In the wake of the bankruptcy of Toys R Us, investing in the toy industry has been a difficult proposition. While the worst of the pain may be in the rearview mirror, many investors believe that the turnaround could still be months away -- if it happens at all this year.
Hasbro's (HAS -8.11%) better-than-expected second quarter results provided hope that the good times could return sooner rather than later, but some investors are still waiting in the wings. That's a mistake, according to one analyst who outlined five reasons that Hasbro could soon regain its all-time highs -- and then some.
Eric Handler of MKM Partners has upgraded Hasbro from neutral (hold) to buy, and boosted his price target from $92 to $115 -- just below the stock's all-time high from last July. While the Toys R Us bankruptcy and subsequent liquidation created problems for the entire industry, Hasbro is much stronger than its competitors and "is well positioned for a material fundamental recovery over the next two years."
Hasbro has already been showing signs of such a recovery, gaining more than 18% since bottoming in mid-April. Handler believes that rally will continue, citing five catalysts that will propel the company to even greater heights.
Frozen 2 will be hot
Hasbro has been the official producer of toys for Walt Disney's (NYSE: DIS) Frozen line since early 2016, and Handler believes that the highly anticipated sequel, Frozen 2, will be a significant driver of additional toy sales heading into the film's release in Nov. 2019.
The original Frozen, which debuted in late 2013, made more than $1.27 billion at the global box office during its theatrical run and became a worldwide phenomenon. It's believed that Frozen generated more than $1 billion in licensed merchandise in 2014 alone and more in the years that followed. This could provide Hasbro with a significant opportunity if the sequel is anywhere near as popular as the original. Handler believes Frozen 2 could generate additional sales for Hasbro of up to $150 million.
The Force will be with Star Wars toys
Star Wars continues to be a fan favorite, with the four recent films generating nearly $5 billion in ticket sales since Disney took the reins in late 2012. The franchise is attracting legacy fans and bringing new ones into the fold. This ongoing success (the tepid performance of Solo notwithstanding) leads Handler to conclude that this will drive incremental toy sales of $125 million.
Classic reboots, Marvel, and a little Magic
Disney has seen impressive success producing live-action versions of some of its classic animated movies. Alice in Wonderland and Beauty and the Beast have each generated more than $1 billion in ticket sales, and Handler sees that trend continuing. A live-action remake of Aladdin is scheduled to be released in May 2019, and this and other movie tie-ins could help boost sales.
The ongoing popularity of movies bearing the Marvel brand, as well as a litany of TV shows featuring the fan-favorite characters, will also generate incremental toy sales for Hasbro. Avengers: Infinity War become one of the most successful movies of all time, generating more than $2 billion in worldwide box office, ensuring that toys tied to the popular franchise will be strong for the foreseeable future.
Magic: The Gathering, Hasbro's fantasy trading-card game, has also seen increased popularity and was among the company's strongest performers in its most recent quarter. Handler thinks the momentum will continue, leading to additional sales of both the cards and the game.
The bottom line
Handler argues that those catalysts alone should be enough to drive incremental revenue of $500 million. These factors, along with the addition of new toy lines related to Hasbro's recent acquisition of Power Rangers, and even modest margin expansion, could provide Hasbro with double-digit net income growth going forward. He believes this will lead to $6 in earnings per share by 2020, significantly outpacing the $3.12 and $4.34 in diluted earnings per share the company generated in 2017 and 2016, respectively.
Handler also sees Hasbro exceeding its goal of operating cash of $600 million to $700 million annually, which will allow for 10% dividend increases, as well as additional share repurchases amounting to $250 million annually -- all without dipping into the $1.2 billion in cash on the company's balance sheet.
While the Toys R Us bankruptcy took its toll on the industry, I -- like Handler -- believe Hasbro is in the best position to ride out the short-term disruption and ultimately reward long-term shareholders.