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Baby Yoda Toys Are Here! Should You Buy Hasbro Stock?

By Rich Duprey – Feb 26, 2020 at 9:16AM

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The toymaker could use a sales lift from the star of "The Mandalorian."

Not only is Baby Yoda the breakout star of Walt Disney's (DIS -2.88%) Star Wars streaming TV show The Mandalorian, but the character's new toy line from Hasbro (HAS 0.61%) also captured the headlines from this year's Toy Fair.

And it couldn't have come at a better time for the toymaker, which has seen its stock lose a quarter of its value since October. Tariffs first took a toll on shares, and now the coronavirus outbreak is knocking them down.

The Child from Disney's The Mandalorian

Image source: Disney.

On the same day Hasbro and Disney announced they extended their marketing partnership for Marvel and Star Wars toys and games, the toymaker's stock tumbled more than 9%, because it looks as if the coronavirus contagion will get worse before it gets better.

Investors now might want to consider whether Baby Yoda can help levitate Hasbro's stock again.

Partners in success

There's good reason to believe The Child, as the character is officially known -- along with the full cast of Marvel Universe and Star Wars characters -- will help drive Hasbro's bottom line higher. Revenue from partner brands like Disney, Comcast's DreamWorks, and Tomy rose 24% in 2019, hitting $1.2 billion, accounting for 26% of Hasbro's total revenue.

Beyblades, a line of spinning top toys, for example, has been a consistent performer for the toymaker, as Tomy continuously introduces new products and digital innovations to keep the product fresh. And DreamWorks' Trolls series is looking forward to a new movie release in April that should help spur renewed interest in the line.

While Disney's deep portfolio usually drives most of the gains, Hasbro actually ran the risk of losing revenue after Disney damaged the lucrative Star Wars franchise by releasing back-to-back-to-back movies that were poorly received by fans. Disney shelved plans for similar spinoff films, and the fan backlash to The Force Awakens and The Last Jedi had Disney CEO Rob Iger saying additional Star Wars films were on hiatus until at least 2022.

Yet as The Mandalorian series proves, so long as there are interesting characters and plot lines, there remains a deep well of interest for the franchise, including for spinoff projects. This should make Hasbro very happy, because the rest of its portfolio is hurting.

Bored with games

Franchise brands, which account for half of all revenue, or more than $2.4 billion, and include Magic: The Gathering, Monopoly, My Little Pony, and Nerf, saw sales fall 1% in 2019, while its gaming division, which includes well-known games like Dungeons & Dragons, Jenga, Scrabble, and Twister, suffered a 10% drop to $710 million.

But the decline isn't evenly distributed; properties like Magic: The Gathering drove sales 30% higher for the year, meaning other properties are tanking hard.

Partially, that's a result of Hasbro still feeling the lingering effects of the Toys R Us bankruptcy even at this late date, as well as the impact of the trade spat with China that raised costs and lowered sales. Now, just when the dispute has been largely resolved, the coronavirus outbreak threatens to create new havoc, and that makes investing in Hasbro a little dicey at the moment.

Under the weather

While the coronavirus will ultimately be a transitory issue for the toymaker and most other companies, it is going to have an impact beyond the confines of its start and end, much as the toys R Us bankruptcy has.

CFO Deborah Thomas said during Hasbro's earnings conference call that its supply chain had been disrupted by the outbreak, and though the impact at the moment was small, she admitted, "it's challenging to quantify the potential magnitude at this time as it will depend on how long it takes to contain the outbreak."

Businesses in China might need bailouts to survive, with Bloomberg reporting "millions" of companies face ruin if banks don't prop them up. Most of Hasbro's suppliers are located in China.

Fortune says 94% of Fortune 1000 companies have suffered similar disruptions, and Goldman Sachs is warning of a "non-linear" drop in inventories after current supplies run out.

Not enough lift

The toymaker had a strong response to The Mandalorian toys like the Black Series that were available in stores during the holidays, and Disney missed an opportunity to capitalize on the TV show's popularity when it didn't have a Baby Yoda toy available for Christmas.

That's been corrected now, and The Child toys will be released next month. They will undoubtedly give Hasbro sales a bit of a boost. But unless the toymaker can get its other properties growing again, and until Disney can prove that its massive Disney+ subscriber numbers can hold after free trials end, and until investors can grasp the full severity of the coronavirus outbreak, it might be better to pass up Hasbro stock for the time being.

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 recommends Comcast and recommends the following options: long January 2021 $60 calls on Walt Disney and short April 2020 $135 calls on Walt Disney. The Motley Fool has a disclosure policy.

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Hasbro Stock Quote
$68.97 (0.61%) $0.42
The Walt Disney Company Stock Quote
The Walt Disney Company
$97.16 (-2.88%) $-2.88
Comcast Stock Quote
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