Delayed TV Production Dents Hasbro Again In Q3 2020

Hasbro (HAS 3.77%) stock has been on an emotional rollercoaster this year. Toys and other entertainment tend to underperform during recessions, and the stock lost over half its value early on in the pandemic. But a big rebound came fast as it became clear this was no normal recession -- toys and games have been in high demand during the economic lockdown.

That trend continued during the summer months. But TV production is still delayed at the Entertainment One (eOne) property, acquired in the final days of 2019. This issue is keeping a lid on a full-blown Hasbro recovery, but it is making a return to growth in 2021 a solid possibility. 

Image source: Getty Images.

A mixed bag in Q3 2020

Hasbro stock recently raced higher on solid results from toymaker rival Mattel (MAT 1.16%). But Hasbro and Mattel are no longer an apples-to-apples comparison. While demand for toys and games has been resilient for both companies, Hasbro's $3.8 billion takeover of eOne (best known for the Peppa Pig children's cartoon) weighed heavily again in Q3 2020 earnings. TV and film revenue took a 29% year-over-year tumble as productions got bumped back into 2021, although some projects resumed work at the end of Q3. 

Data source: Hasbro.

Investors could at least take solace in another quarter of solid toy, board game, and digital game performance. Of particular note was the only-4% decline in partner brand sales. A year ago -- which seems like a bygone era at this point -- Hasbro was riding Disney's (DIS 1.51%) coattails with the then-upcoming films Frozen 2 and Star Wars: The Rise of Skywalker, as well as the first season of The Mandalorian on Disney+. With theatrical releases also scuttled until at least next year and Hasbro lapping the resulting landmark 2019 in its partner toys division, the modest decline was also good news as far as this shareholder is concerned. 

In total, revenue through the first nine months of 2020 is down 12% from a year ago to $3.74 billion, again mostly dragged down from the new TV and film production studio. 

TV production sure would be nice

The takeover of eOne was pricey and in hindsight looks like an untimely purchase, but crises have a way of upending the best-laid plans. Not to worry, though. Hasbro CEO Brian Goldner had this to say on the Q3 earnings call:

The restarting of live-action entertainment is gradually occurring, with some of our larger productions beginning late in the third quarter. As a result, deliveries were low but are set to improve in the fourth quarter and some revenue will move into 2021. 

Thus, while toy sales are helping bail out what would otherwise be a disastrous year, light is appearing on the horizon as 2021 approaches -- giving some hope that Hasbro will return to growth at that point. And with the return of TV shows and movies from eOne, the bottom line should see a dramatic improvement too.

In the meantime, though, Hasbro is doing pretty decent all things considered. Free cash flow (basic profits measured as revenue less cash operating and capital expenses) through the first nine months of 2020 was $402 million -- up 35% from $299 million during the comparable period in 2019, and good for a free cash flow margin of 10.7%. 

Helping the picture on this front has been Hasbro's successful pivot to digital sales. The company reported another 50% year-over-year increase in e-commerce during Q3 alone. With its digital transformation well underway here, adding positive eOne momentum will be icing on the cake. Hasbro currently trades for just 18.4 times trailing 12-month free cash flow as of this writing. The playtime and entertainment outfit will most certainly benefit from easing effects from the pandemic, but it remains on my buy list at these levels.