One of the largest acquisitions for Hasbro (HAS) was the purchase of Wizards of the Coast for $325M in 1999. Wizards of the Coast is a Seattle, WA based gaming company that produces the card game Magic: The Gathering along with many other games, including Dungeons & Dragons. While the role playing section of the subsidiary has been lackluster at best in the last few years, the investment made into Magic continues to pay off handsomely.
Before being acquired by Hasbro in 1999, Wizards of the Coast leveraged its available capital to enhance its offerings through the buyout of TSR, the original production company for Dungeons & Dragons, in 1997. Also in 1997, the company was awarded with U.S. Patent 5,662,332 on collectible card games. The purchase by Hasbro, soundly beating competing bids from Mattel (MAT), came at a great time as the company was expanding internationally and continues to do so to this day.
Going by the Hasbro's first quarter 10-Q in 2000, the acquisition of Wizards of the Coast more than doubled the revenue of the games division of the company going from $208M in 1999 to $440M in 2000. While the exact composition of the categories may have changed in the intervening 12 years, the games division of the company continues to generate a significant portion of the net revenues, producing 26% of the total for last quarter.
While the games division posted an 8% year-over-year decline in net revenue in 2Q 2012, the largest brand for the division, Magic: The Gathering, was listed as the strong point and posted undisclosed positive growth for the company. Before we go deeper into the details, let go over some basics about this money maker for Hasbro.
Created in 1993 by Dr. Richard Garfield, one of the founders of Wizards of the Coast, Magic was the first collectible card game and was an instant hit. When it debuted in 1993, the company brought with it to sell to the public what they thought would be a year's worth of supply. They sold out in three days. Needless to say, the game caught on and the idea spawned many clones such as Pokemon, Yugioh, and many such others. While many have come and gone, Magic has endured and thrived over the last 19 years.
The game itself has been described as a mix of playing poker and chess with baseball cards. There is an element of randomness in the game that allows anyone a chance to win, while layers of strategy are involved from start to finish, keeping it intellectually challenging and rewarding. Instead of relying on gamers to be played with prepared sets of cards, the company innovated and introduced the idea of playing with random sets of cards, which introduced a whole new method of game play while also increasing product sales. Even if you already had all the cards, you would be forced to buy more products to play in the new formats.
Magic has matured over time and stratified along the times which you started playing. Just as people remember their favorite baseball players from when they were young, so to do players of the game tend to prefer products from when they played most intensely. While many competitors had initial success and quickly faded, the brand loyalty that exists for Magic has been enhanced by the decisions of the game's developers. One thing that the game developers have succeeded in is keeping the game fresh through a yearly change in tone and theme.
Since every theme allows for an effective reboot of the game, this keeps it new and exciting for new and old players alike. While last year's theme was horror and had lots of references to vampires, zombies and werewolves, this year will be a theme of conflicting factions, intrigue and allegiance to an ideology. Past themes have included robots, ninjas, and samurai - pretty much every fantasy theme imaginable and then some. Last year's horror theme provided the game, and Hasbro, with its most successful year yet.
As it happens, this year's theme should prove even more popular. The first of three main products for the year have been revealed by the company and the initial feedback has been extremely positive. Sales start in October and will be followed by additional releases in February and June.
The Coming Year
Given the popularity of the upcoming theme for Magic, I would be unsurprised if they were able to manage as much as 25% growth in what is already the company's largest brand. While the 10-Q does not break it out, we can estimate that if Magic grew last quarter, easily doable given the increased popularity and confirmed in the 10-Q, while the games division fell 8%, that Magic accounts for somewhere under 50% of the total net revenues for the division and under 13% for all of Hasbro.
If this year is as successful for the game as I believe it will be, the new products could positively impact total net revenues by as much as an additional 3.25% above the projected revenues. Since the average analyst estimate for net revenues projects 1.87% year-over-year growth, we could see a significant positive surprise in the coming 12 months.
Hasbro has been trading strongly with the rest of the market in the last few weeks, hitting a new 52 week high on Friday of last week. The stock is working off overbought conditions, and could see some more weakness in the near term. Technically, the stock is in the middle of a strong uptrend and is trading above all of its significant moving averages. The weakness we are currently seeing should provide a buying opportunity, especially for those looking to establish long-term positions.
Fundamentally, the company is back on the track to strong growth and pays a significant 3.6% dividend with a healthy payout ratio of 48%. Along with Magic, the company should benefit by continued merchandising from their Marvel licensing with Iron Man 3 and Thor 2 coming out in 2013. Avengers coming out on DVD in September should provide an additional short-term bump in merchandising for the company. Going even further into the future, we have more Marvel movies as well as Transformers 4 with a whole new cast of robots and accompanying toys.
Being able to tie my love of games with my interest in trading is always a welcome scenario. Luckily, Hasbro provides me with this opportunity and should provide entertainment and gains for those interested in coming year.