Hasbro Has An Underestimated Revenue Stream Coming

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About: Hasbro, Inc. (HAS), Includes: IEME, VSL
by: Christopher VanWert
Summary

Hasbro has taken a recent hit with the Toys R us bankruptcy.

It's current changes to improve their brands through media, pushing digital games and focusing on ecommerence are going well.

Revenue is underestimated if estimated at all for Magic: The Gathering Arena's launch.

Summary

Hasbro ($HAS) has been a toy company since 1926 and recently has been changing into a play and entertainment company. This transition comes as their young customer’s preferences move from physical to digital stimulation. No other event marks the necessity for this pivot than the bankruptcy of Toys R Us in 2018, which also had consequences on Hasbro’s top and bottom lines last year.

Created by Author with Data from the 10-k Q4 2018

Hasbro’s franchise brands consist of Monopoly, parts of Magic: The Gathering (Wizards of the Coast), Nerf, My Little Pony, Play-doh and Transformers.

Hasbro has partnerships for developing, marketing and selling products based on other brands such as some segments of Disney, Beyblade, Marvel, Sesame Street, Star Wars and Dream Work’s Trolls.

Hasbro lists their emerging brands separate as they’re more under development, the largest of which is their recent acquisition of Power Ranger’s and Littlest pet shop.

Under it’s gaming segment Hasbro holds Dungeons & Dragons, Connect 4, Jenga, Pie Face, Speak Out, Don’t step in it and Parts of Magic: The Gathering.

Hasbro has also taken to the film industry in order to establish their brands, extend their influence and take advantage of the current changing film landscape. This is done through Allspark Pictures, Allspark Animation, Boulder Studios and Backflip. Mostly, it’s to market their products and keep them in popular culture. Recently they released Bumblebee (the transformer’s side story character-based movie), Ouija: Origin of evil and My Little Pony: The Movie. These movies have grossed more than expected with Bumblebee grossing over $414 million to date, Ouija over $79 million and My Little Pony a modest $22 million.

Opportunity

The recent bad news has stacked up against Hasbro’s bottom line and shareholders. Hasbro was recently hit hard in Q4 of 2018 with the bankruptcy of Toys R Us. Aside from losing their third largest U.S. marketplace, there was also the settling of accounts and liquidation of inventory which came in worse than expectations. Harsbro has also seen retail sales decline outside of Toys r Us.

Despite this, Hasbro is refocusing and has a couple of large revenue segments that are on the verge of recognition. Hasbro has begun focusing more on their entertainment and licensing deals.

Taken from Hasbro Investor Relations, Q4 2018 earnings call slides

The company’s movie into Movies and Television along with focusing on digital gaming has started to see some successful growth even in its early start. Hasbro’s online market presence has greatly increased over the past year, becoming the number 1 toy and game retailer on Amazon in the U.S. and Canada.

The one most talked about new IP and products by management and analysts how have been covering Hasbro is the acquisition of Power Rangers. With a new TV show in the pipeline to be launched in Q2 of this upcoming year Hasbro is trying to recapture the magic from the youth of the late 90’s. They are also in talks with Paramount pictures to produce a sequel to the 2017 movie, however this release was a box office flop. On the other end, this did lead to record sales in the merchandise department and helped fuel the acquisition from Saban last year.

Nerf is moving into a line of products based on popular first-person shooter video games such as Overwatch and the infamous Fortnight. Nerf sales were hit hard with the Toys R Us bankruptcy and retail inventory liquidation. Hasbro moving to product deals with popular first person shooters looks like a good strategy with Fortnight currently capturing 200 million players (Source).

However, what really spurred the desire to write this article is a large increase in revenue that should come within the next few years that no one seems to be analyzing yet. Magic the gathering: Arena Mobile. With Hearthstone delivering somewhere around the $400-$450 million in revenue for digital customizable card games for 2018, this market is large and will have a definitive impact once MTG Arena launches. The market for digital card games is expected to be $2 billion in 2020 (Source: Superdata) It seems obvious that Arena was made for a mobile platform. The point, click and drag nature of the game lends itself to feeling like a mobile game on a PC platform. In fact, current players are finding ways to play the beta version of the game on their mobile devices without support. This speculation only seems more probable with Hasbro’s acquisition of Backflip which specializes in mobile gaming. However, backflip also makes sense as a revenue stream for the many brands and partnerships that Hasbro has.

Taken from Super Data Research

The growth from only PC users to including smartphone and tablet users would be significant. If the launch goes well and Arena competes with Hearthstone for market share, it’s reasonable that Arena brings in revenue of $350 million over a year span. If 33% of total potential users would participate in just the PC release once it’s out of the Beta version, Hasbro has a probable revenue stream of $130 million from MTG Arena currently. Once launched onto mobile platforms, it could eclipse Hearthstone’s revenues in the future. This prospect is not outlandish as Magic: The Gathering has been around since 1993 and was the first customizable card game to gain wide spread acceptance (University of Washington Business School Report Here).

Analyst are predicting a range of revenue of $4.76 billion to $5.15 billion for 2019. This growth estimate is mostly driven by the Power Ranger’s acquisition, the Transformer’s growth through the Bumble bee movie and the lineup of Marvel and Disney movies to drive merchandise sales. Hasbro announced this earning’s call that they intend to release the game out of beta before the end of the year. Assuming Arena launches on mobile platforms before the end of Q2, if Arena captures 50% this untapped mobile market it would be revenue of $115 million on top of the probable PC driven revenue. However, some of this potential revenue is already in the financial statements as many die-hard magic fans are already purchasing digital products despite the release only being in Beta.

Financial Results

Hasbro reported earnings per share of $1.74 unadjusted for 2018 but adjusted to $3.85 after accounting for the Toys R us Bankruptcy. Adjusted EBITDA/interest was 7.5 in 2018 compared to 8.25 in 2017 and 8.1 in 2016. This is still a comfortable margin and overall debt stayed mostly flat, increasing from $1,693 million to $1,695 million. While operating profit was down 16% after adjustments, this decline was still impacted by Hasbro not being prepared for the bankruptcy with enough retail outlets to handle the inventory that was under management at the time. In the future the company will not have such volatility in storefronts, especially as the company moves more into the ecommerce and digital markets.

Valuation and Staying Power

Taken from Investor Relations Hasbro, Q4 2018 Earnings Call Slides

Hasbro has had a steadily increasing dividend over the like 15 years and only skipped an increase during the great recession of 2008/2009. This year is the first time since the great recession that Hasbro has had a drop in earnings per share as well.

Hasbro’s brands have a significant value. Normally as a company degrades its brands go with it. Hasbro’s brands and recent acquisition have stood the test of time as Power Rangers have been around since 1993, Magic the gathering since 1993, Nerf since 1969 and Monopoly since 1902. As Hasbro keeps up with popular culture and stays connected to their target market, their brands will retain value even if sales diminish.

Hasbro performed well when the economy slowed down. During the last recession Hasbro come out on top, proving that parents still buy toys for their kids when money become tight.

Taken from finance.yahoo.com

Hasbro did take a hit during the dot com bubble however, as it was on the cutting edge of keeping up with their target market’s desires. While it was ultimately the right path, their stock spiked and then dropped as revenue and earnings recognition went out the door and then slamming back to reality.

Taken from finance.yahoo.com

Given that the crux of the value in this situation is underestimated revenue, a discounted cash flow model is more useful then a dividend growth model to approximate value here.

Created by author using 10-k’s

Created by author using 10-k’s

Created by author using 10-k’s

Created by author using 10-k’s

Created by author using 10-k’s

Created by author using 10-k’s

The main assumptions used in this discounted cash flow model are a Free cash flow growth rate of 7.91%. While this may seem high over the last 15 years Hasbro has had a growth rate of 9.21%. Using the pro forma statements dragged out 20 years, the model gives you a growth rate of 9.12%

The revenue projection for next year is the high estimate of $5.15 billion and gives us a share value of $111.23 which is a 26.3% upside from its current price. Adjusting for the lowest estimated revenue gives us a share value of $103.16 which is a 17.1% upside.

The weighted average cost of capital is calculated using current interest payments and long term debt along with the dividend method for calculating return on equity.

In conclusion

Hasbro is headed in the right direction with a history of performing well in changing environments, such as changing technology and economic slowdowns. Hasbro also has a resilience in demand despite not being a consumer staple. The unexpected revenue from Arena’s launch, if it goes well and inside the first half of this year, will push Hasbro over estimated revenues for 2019. If pushed out, Hasbro is likely to meet revenue growth estimates through the strength of it’s partnership brands and recent acquisitions backed by it’s solid revenue brands.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in HAS over the next 72 hours. 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.