When Hasbro (HAS 1.57%) released its Q2 earnings report earlier this week, investors were...underwhelmed, I suppose is the word. Hasbro knocked it out of the park on Tuesday, reporting revenue just a little bit shy of what Wall Street analysts had predicted ($1.3 billion), but earning vastly more profit than anyone had expected: $1.15 per share in adjusted earnings, which was $0.20 per share ahead of expectations.
And yet Hasbro stock closed the day up a mere 0.5%. So what didn't investors like?
Hasbro by the numbers
I honestly can't blame Hasbro investors for not knowing what to make of this week's report, because the numbers were kind of all over the map.
Starting at the bottom, Hasbro's entertainment division saw revenue plunge 18% year over year. That sounds bad, but entertainment is the smallest segment at this "global play and entertainment company" (as Hasbro styles itself). What's more, the entertainment division shrank even more by voluntarily selling off its music business, which caused most of the decline. The rest of the shrinkage was largely explained by the delivery schedule of Hasbro's several film and television projects.
(On the plus side, the entertainment segment lost money a year ago, but was profitable in Q2 2022.)
In contrast, Hasbro's much larger consumer products division grew its sales by a very respectable 7% to $734 million in the quarter. Investors might have been more impressed by this feat, however, if Hasbro had managed to turn that sales gain into a profit. Instead, Hasbro reported a small $6 million loss in the segment.
Saving the best for last, we now turn to the Hasbro division that new-ish CEO Chris Cocks used to head up personally: Wizards of the Coast and digital gaming. This is the segment housing Hasbro's ultra-popular Dungeons & Dragons (D&D) and Magic: the Gathering (MtG) franchises, and business here is still going quite well. Sales were up 3% year over year, helped in part by the decision to buy out digital gaming tools shop D&D Beyond. Even better, profits surged a strong 17% to $226 million.
Within the division, momentum shifted somewhat away from D&D and toward MtG, where sales soared 15%.
The big picture for Hasbro
So the numbers were kind of a mixed bag. In a company with so many moving parts, therefore, an investor may be best advised to pull back and examine the big picture.
As a whole, Hasbro grew its Q2 sales only a modest 1% year over year. Operating profits, however, nearly tripled to $219 million, while adjusted earnings increased 10%, and net profit when calculated according to generally accepted accounting principles (GAAP) flipped from a loss one year ago to a strong $1.02-per-share profit in Q2 2022.
So on the profits front at least, you could say Hasbro rolled a 1 a year ago, but scored a critical hit this time around -- a natural 20.
The upshot for investors
And Hasbro could do even better in the second half. Consider: Over the past six months, Hasbro has racked up total net income of $203 million. Extend that run rate over the rest of this year, and the company might be on course to earn $400 million, valuing the stock at a rather pricey 27.5 times current-year earnings.
Historically, however, Hasbro almost always earns vastly more in the second half of the year than in the first. Analysts expect this year to be no different, and are interpreting management's guidance -- unchanged since last quarter -- for "low-single digit revenue growth" and 16% "adjusted operating profit margins" to imply the company will wrap up 2022 with sales in excess of $6.6 billion and net income of $677 million.
That gives Hasbro stock a current-year P/E ratio closer to 16.
With S&P Global Market Intelligence forecasting about a 12% annualized earnings growth rate for Hasbro over the next three years, and the company paying a generous 3.5% dividend yield, 16 times earnings seems like a fair price to pay for Hasbro right now.