Hasbro (HAS 11.85%) saw e-commerce sales accelerate during the pandemic as families sought out games to play at home. But strong e-commerce sales couldn't overcome the restrictions put on business operations, including supply chain shortages and retail store closures. These disruptions caused Hasbro's total revenue to fall 8% in 2020, sending the stock price down 11.4% for the year.
However, Hasbro has too many growth opportunities for it to stay down for long. Here are three reasons this is a great time to buy shares.
Image source: Getty Images.
1. Investors are underestimating Hasbro
Hasbro is positioned for a strong recovery. Just recently, management unveiled new reporting segments to simplify the company's operating structure. It will now report its business results under three main business segments: consumer products, Wizards of the Coast and digital gaming, and entertainment (for example, film and TV).
| Operating Segment | 2020 | 2019 | Change (Decline) |
|---|---|---|---|
| Consumer products | $3.65 billion | $4.01 billion | (8.9%) |
| Wizards of the Coast and digital gaming | $910 million | $760 million | 19.1% |
| Entertainment | $910 million | $1.17 billion | (22.2%) |
Data source: Hasbro.
Management is making investments across each of these segments that it believes will drive revenue growth over a multiyear period. Most importantly, it believes investments in new products and entertainment initiatives will deliver a higher operating margin and drive cash flow generation toward $1 billion over the next few years.
Before the pandemic, Hasbro was growing revenue at a low-single-digit annualized rate. It's not a high-growth business, but free cash flow doubled between 2010 and 2019. With management targeting further margin gains over the medium term, the stock looks attractive at a modest 15.4 ratio of price to free cash flow.
HAS price to free cash flow data by YCharts.
2. Hasbro is turning the corner
Sales of Hasbro's franchise brands, including Nerf, Play-Doh, and Monopoly, declined 5% in fiscal 2020. Franchise brands are the company's largest revenue source, accounting for 42% of total revenue last year. Still, the weak performance of this group overshadows underlying momentum.
For instance, two franchise brands -- Magic: The Gathering and Monopoly -- had their best year of sales ever, and management launched a new family game, Deer Pong, in the U.S., which is off to a great start.
The last two quarters show sales on the rise. In the third quarter, sales of franchise brands increased by 4% year over year, and then in the fourth quarter, sales growth accelerated again to 7%.
In 2021, Hasbro plans to build on this momentum by penetrating new game categories, such as strategy. "This will drive our leadership to new heights in this all-important $3.7 billion market," chief consumer officer Eric Nyman said at a recent investor conference.
3. It's unleashing its library across the entertainment spectrum
Hasbro completed the acquisition of Entertainment One (eOne) at the end of 2019, and it's already helping the company grow brand awareness across entertainment platforms. During the pandemic, Hasbro had the No. 1 kids' content on YouTube, thanks to eOne.
eOne is taking control of the development of Hasbro's classic brands for film and TV. By 2023, Hasbro expects two to three major motion pictures and three to four TV shows to be distributed across major platforms, including the My Little Pony and Magic: The Gathering series coming to Netflix.
Overall, there are more than 200 projects underway across TV and film. Hasbro has an entertainment project in the works for just about every classic toy and gaming brand in its library, including G.I. Joe, Risk, Clue, Transformers, and Dungeons & Dragons.
With eOne, Hasbro is in a more-advantageous position in the entertainment industry to develop, own, and distribute its content across different platforms. This will allow the company to grow the audience for its toys and games and capture more profits from content distribution.
Hasbro is already starting to bounce back, but this consumer discretionary stock still looks undervalued, based on its modest valuation and the growth initiatives across consumer products and entertainment that management is pursuing.
