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Just How Long Can Hasbro Keep Its Winning Streak Going?

By Rich Duprey - Oct 16, 2019 at 12:00PM

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There seems to be no end to the ways the toymaker can grow.

Hasbro (HAS 0.61%) crushed analyst expectations in the second quarter, driven largely by the monster hit Avengers: End Game and the increasingly popular digital version of its Magic: The Gathering (MTG) role-playing card game. The toy maker's stock has also far outpaced the market index, rising 23% over the past year, or more than three times higher than the S&P 500, making it look like a momentum-based growth stock.

While Hasbro will have more tournaments and games for MTG, as well as new games for the granddaddy of all role-playing games, Dungeons & Dragons, there's a lull in blockbuster movies that appeared in theaters for the period. 

So even if it gets some residual lift from Avengers and Spider-Man sales, it won't be until the fourth quarter when Disney's (DIS -0.20%) Frozen 2 and the last Star Wars installment hit the screen (Frozen toys launched earlier this month) when movies will figure large in its results again. So let's see what investors can expect when the toy maker reports third-quarter earnings on Oct. 22.

Players participating in Magic: The Gathering tournament

Image source: Hasbro.

It's still magical

Magic: The Gathering is probably going to be the big story for Hasbro. Player engagement is rising, and approximately 400 million games of MTG Arena were played last quarter. Some 1.1 billion were played since it launched in September 2018, but with the new tabletop Core Set 2020 issued in July, there's a good chance Hasbro will realize even greater engagement and monetization in the third quarter even though much of the brand introductions were heavily weighted toward the first half of the year.

Hasbro also saw improvements across other brands, including franchise brands like Monopoly, Play-Doh, and Transformers, but extensions of other brands such as Nerf to the hit online game Fortnite did well as well.

Fortnite just recently blew up its universe -- well, sucked it into a black hole -- and reintroduced a whole new world, which could spur new interest in the game. Hasbro began rolling out Nerf Fortnite products last quarter and started hitting international markets in the current quarter. Look for Nerf to have better growth, too, this period.

Plenty of toys in the toy box to grow with

International markets overall began recovering earlier this year, though revenue was down 1% in the second quarter (due to foreign exchange rates). Excluding them, sales were 5% higher. MTG was big overseas, too, but so were Power Rangers, which were getting a new start.

Perhaps what will be of most interest will be what Hasbro says about its $4 billion acquisition of Entertainment One (ENTMF), the owner of the animated character Peppa Pig, which could become a global profit source.

Although Entertainment One just reported a $54 million loss in its own quarterly earnings report, due mainly to weak broadcast and licensing revenue, when it meshes its extensive content library with Hasbro's own television properties, it is expected to reap a significant windfall as it takes advantage of verticals previously unavailable to the toy maker.

Still a good value

The Wall Street consensus sees revenue jumping almost 10% in the third quarter to $1.72 billion, generating a 15% gain in earnings to $2.22 per share at the midpoint. The mammoth results seen so far have caused Hasbro's stock to surge almost 50% in 2019, which may deter some investors, who see that it now trades at 50 times trailing earnings and 23 times this year's estimates -- though that's a more reasonable valuation considering its dominant position.

Having mitigated a lot of the tariff hits from the U.S.-China trade war, and with that battle looking like it may be entering its final stages, there could be more room for Hasbro to grow even if the third quarter isn't the blowout the second was -- or how the fourth is shaping up to be.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Hasbro and Walt Disney. The Motley Fool is short shares of Hasbro and has the following options: long January 2021 $60 calls on Walt Disney and short October 2019 $125 calls on Walt Disney. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Hasbro, Inc. Stock Quote
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The Walt Disney Company Stock Quote
The Walt Disney Company
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Entertainment One Ltd. Stock Quote
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