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Hasbro Stock Upgraded After Earnings: What You Need to Know

By Rich Smith - Jul 26, 2019 at 3:47PM

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What's in the box at Hasbro? A whole lot more profit than Wall Street expected.

Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

Hasbro's ( HAS 0.39% ) Q2 earnings report was a real blockbuster.

Literally. Buoyed by strong growth in sales of toys based on popular film franchises such as Disney's Avengers, Hasbro stock popped 10% on Tuesday -- and hasn't looked back since.

Helping to keep Hasbro's momentum going this week has been a string of analyst price-target raises. And this morning, Hasbro received perhaps the best gift of all: an upgrade from Argus Research.

Here's what you need to know.

Five dice labeled buy and sell on top of LCD screen displaying stock charts and numbers

Image source: Getty Images.

Hasbro's Q2 by the numbers

Heading into Q2 2019 earnings, analysts were cautiously optimistic about Hasbro, expecting pro forma profits to grow modestly to $0.50 per share. Instead of that, though, Hasbro released its blockbuster: Aside from a big charge taken to settle its U.S. pension plan liability, the company grew its pro forma profits 56% to $0.78 per share -- half-again as good as what analysts were looking for.  

That's the good news. The bad news is that counting the effects of that charge, Hasbro's profit as calculated according to generally accepted accounting principles (GAAP) didn't look so hot. After subtracting a $0.67-per-share noncash charge to earnings for the pension settlement, Hasbro's net income for the quarter was only $0.11 per share.  

While this was certainly a disappointment, however, the pension charge should be a one-time event -- and perhaps quickly forgotten if the rest of Hasbro's numbers continue growing like they have been. In that regard, sales grew a healthy 9% year over year, and free cash flow -- which was negative $120 million a year ago -- flipped to positive $39 million in Q2 2019, according to S&P Global Market Intelligence data.

What Wall Street had to say about that

The response on Wall Street has been little short of a standing ovation. According to StreetInsider.com's latest tally, no fewer than six separate analysts increased their price targets on Hasbro stock in the days following earnings -- to as high as $143 a share at Citigroup. And this morning, a seventh analyst weighed in, the aforementioned Argus Research.  

Calling Hasbro "a leader in the U.S. toy industry" and the stock an "attractive investment for growth-income investors," Argus praised the company for developing "a range of strong global brands that include Transformers, Nerf, and My Little Pony."

Hasbro also "dominates in the big-screen business, generating revenue from its Disney Princess, Marvel and Star Wars licensed products." Furthermore, Argus foresees the company posting "strong international growth, particularly in the Asia Pacific region and other emerging markets" in quarters to come.

Indeed, TheFly.com quotes Argus predicting Hasbro is on pace to earn as much as $4.65 per share this year, and perhaps $5.20 in fiscal 2020 -- a 12% increase and ahead of average analyst estimates.

What it means to investors

Granted, there's still the question of whether even $4.65 per share is enough profit to justify Hasbro's stock price today, now that it's already surged after earnings.

When last spotted, Hasbro shares were trading for a whopping 26.6 times trailing earnings, and nearly 24 times what Argus says it might earn next year. And if you ask me, that's a bit too rich of a price to be paying for a toy maker with 12% growth ahead of it -- even one coming off as great of a quarter as Q2 was for Hasbro.

Clearly, however, I'm in the minority in that view.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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