At the worst point of the initial coronavirus sell-off (I say "initial" because it's anyone's guess if selling decides to resume once more), toymaker Hasbro (HAS 12.37%) was down nearly 60% from its high-water mark in 2020. Even worse, shares were down 67% from all-time highs registered in 2019.
I started scooping up the stock during the downturn, and I've already been rewarded. After briefly trading in the low $40 range, the stock has rallied back to $71 a share as of this writing. I'll take it, although I'll admit I wasn't expecting that quick of a rebound. Part of the reason has to do with CEO Brian Goldner saying in a recent interview with CNBC that demand for his company's products during the crisis has been strong. That's great. However, the real reason I added to my position was that I saw -- and still see -- a longer-term value in the making.
Entertainment One's Peppa Pig, recently acquired by Hasbro. Image source: Entertainment One.
The case for toymakers
On one hand, the prospect of millions of kids around the globe stuck at home sounds like good news for toy manufacturers and retailers. That is especially true for Hasbro since the company is not only responsible for popular brands such as Transformers, Play-doh, and Monopoly (to name just a few), but it's also the handler for much of Disney's toy merchandising. Hasbro also has a digital segment that makes TV and video game adaptations of its toys.
No matter how you look at it, actual toys and digital entertainment should both be in strong demand with many households sheltering in place right now. Goldner's comments were seen as reinforcement of that idea, although I'd point out that comments on "strong demand" had no numbers attached. Even a decline in overall sales could still be deemed a win depending on how bad the economic fallout ends up being due to coronavirus. Thus, I'm curbing my enthusiasm until Hasbro actually reports on its first-quarter 2020 results.
However, demand is only half the equation. One of the other concerns was that the COVID-19 pandemic will also create supply chain disruption. With the outbreak first hitting China and the subsequent clampdown in the country, many businesses were left scrambling to reroute manufacturing and shipping as the world's most populous country plays a key role in supply -- including for Hasbro. However, Goldner also said, "supply chains are back up and running in China." Thus, it would appear that the coast is clear for this toy company.
Not perfect, but well-positioned for the future
To be sure, I'm certainly not betting on all things going perfectly. In fact, I think there will be some hiccups. If not from consumer spending problems or short-term issues with supplying the desired number of toys, then at the very least, I think Hasbro's recent acquisition of Entertainment One -- the parent company of Peppa Pig and PJ Masks (ask a child under age 10, or their parents, who that is) -- could present a challenge.
I like the direction Hasbro is going with this, but EOne is a production studio. While Hasbro is no newcomer to show business (think the Transformers movies), making content in-house is different from licensing it out. Details on the company's plans are forthcoming, but I expect there to be some growing pains. Plus, Hasbro also had to take on new debt to make the deal work. At the end of 2019, total debt for the company had more than doubled from 2018 to $4.1 billion, while cash and equivalents stood at $4.6 billion. (That cash balance will decrease significantly as it was reported at the end of Hasbro's fiscal year ended Dec. 29, 2019. The deal went through the next day, on Dec. 30, and paid out $3.8 billion to EOne shareholders.)
If Hasbro is resilient during this crisis and the subsequent decrease in global economic activity, its balance sheet shouldn't be cause for concern. Still, with shares trading down 40% from all-time highs even after a relief rally, significant pain has been priced in.
Given this consumer discretionary stock's prospects for the long haul and the direction it's headed with its top playtime brands -- a unified entertainment outfit that covers both the physical and digital worlds -- it looks like high time to buy. And as the company releases more info on its performance in the coming months, I'll be looking for other opportunities to buy again barring any significant change in the company's long-term prospects.
