Is Hasbro A Good Play?

| About: Hasbro, Inc. (HAS)

Summary

License from Disney gives Hasbro the edge over competition, but is it too dependent?

Original franchise brands continue to grow.

Ability to create innovative products will drive long term earnings for Hasbro.

Hasbro (NASDAQ:HAS) is a multinational toy company that is one of the biggest in the world. The stock has soared over 140% since the summer of 2012, and there are several reasons why this discretionary play can continue to outperform going into the latter part of 2016. Hasbro's exclusive partnership with Disney (NYSE:DIS) will continue to drive profits, as several new Star Wars films will be coming down the pipeline until 2019 and beyond. Hasbro's movie toys were among the best sellers, in particular Star Wars related toys, with a 13% YoY increase in 2015 from fiscal 2014. The huge popularity of Disney's movies caused sales to skyrocket, as Hasbro's stock soared to new highs. The stock has major tailwinds in its Disney partnership, and the fact that the company is still able to grow one its classic line of franchise brands. In the last quarter, Hasbro was able to grow its boys, girls, and preschool toy revenues by a very impressive 24%, 41% and 11% respectively. In addition to the popularity of the Star Wars toys, Hasbro's original franchise brands, like nerf and play-doh, still have tremendous sales growth due to Hasbro's fantastic marketing campaign.

License from Disney gives Hasbro the edge over competition, but is it too dependent on Disney for its success?

Hasbro is getting a huge boost to its toy sales thanks to its partnership with Disney to be the exclusive producer of Disney themed toys. In the fourth quarter of 2015, Hasbro got a huge jump in sales thanks to the huge international popularity of the movie Star Wars: The Force Awakens, as the Star Wars themed toys were one of the best selling items during the holidays. The movie smashed box office expectations, which produced a huge tailwind for Hasbro in its movie based toy sales. Going forward, CEO Brian Goldner sees 2016 Star Wars revenue being in line with the 2015 revenue which was a great success. Goldner stated "Retail and consumer demand for Star Wars remained very high, and at this early stage of the year, we continue to believe 2016 revenues could be in line with last year. Rogue One: A Star Wars Story is scheduled for release on December 16, 2016." Hasbro expects to release rogue one based toys in fall, right before the film is released, and there are huge reasons to believe that Star Wars toy demand will still be high given the massive fanbase to the franchise.

Hasbro has also received a sales boost in sales of dolls based on Disney Princesses, Frozen in particular which was the best selling. The Disney Princess dolls accounted for a massive 41% growth of $117 million to $165 million compared to the same quarter last year. Girls toys have been underperforming boys toys for a majority of the company's lifetime, however, girls toys have been seeing much higher growth than boys toys. This can be attributed to the tremendous success of Disney movies, and Hasbro's ability to market its dolls.

Original franchise brands continue to grow

Franchise brands are the classic toys that have been around for decades such as Play-Doh, My Little Pony, Monopoly and Nerf. Hasbro has managed to grow these brands by a very impressive 17% increased YoY revenue thanks to its ability to bring different twists on these classic toys, such as having Zombie Strike or Star Wars themed Nerf guns. Nerf continued to lead the classic franchise brands segment, as revenue jumped 13% YoY thanks to a new innovative twists on a classic toy. Hasbro is expected to continue to innovate new twists going forward, as the partnership with Disney will always continue to open new ideas for a new twist in a much loved classic. There is a reason why Hasbro's franchise brands have been strong for so long. There is a huge moat around these classic brands, and Hasbro's ability to innovate its classic toys are a proven growth strategy that will continue to grow for the long term, as its portfolio continues to get bigger with new innovative toys to add to its already impressive lineup.

Risks

A huge risk to the long term performance of Hasbro lies in its partnership with Disney. Hasbro is highly dependent on Disney, and its ability to create new and exciting characters. If for some reason the partnership spoils, then we may see a huge pullback in the price of Hasbro. While this scenario is unlikely, it should be made clear that a bet on Hasbro is also a bet on Disney. It would be nice to see more sustainable drivers of growth that are not reliant on a licensing agreement, because nobody knows how long such a license will last in the long run. Weaker than expected consumer spending, unfavorable customer responses to new toys, or increase in competition from firms such as Mattel (NASDAQ:MAT) could limit any additional upside for Hasbro from current levels. While Hasbro has huge tailwinds behind it, I believe most of this optimism is already priced into the stock. I would wait for a pullback that would put its valuation metrics more in line with its historical averages.

Valuation and Conclusion

Hasbro continues to gain market share over its competition according to Goldner. Hasbro's fantastic ability to innovate its legacy products, and have new toys based on very popular Disney movies will continue to drive the stock higher in the short, and medium term. Hasbro has returned an average of over 30% the last four years. While it is unreasonable for an investor to expect such tremendous returns for the long term, I do believe that Hasbro still has a lot of great years ahead of it considering the huge tailwinds from the Disney partnership. The long term prospects of the business appear to be intact considering the huge portfolio of great brands that continue to see increased sales, as long term revenue growth has been very strong with a compounded annual growth rate of 2.7% over the last five years. The stock currently trades at a 22.6 P/E, with a 6.6 P/B, and a 2.2% dividend yield. All of which are higher than its five year historical averages of 18.3, 4.3 and 3.2%. The stock is priced at a huge premium, as the current PEG ratio is at 1.7. While I do believe the stock has tremendous potential to outperform, there is very little margin of safety, as you will be paying a considerable premium if you buy the stock right now. Hasbro is also highly leveraged with a debt-to-equity ratio of 1.07, which is much higher than its peers in the consumer discretionary space.

Disclosure: I am/we are long DIS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.