The downgrade comes after the analyst's research indicates that Hasbro is over-distributing Magic: The Gathering playing cards, which could dilute the brand. Lower demand across the business has pressured Hasbro's profitability this year, which has weighed on the stock -- it's down 43% year to date.
Magic is estimated to make up over a third of the company's adjusted operating profit, so if sales were to fall, it would be problematic for Hasbro's business. The analyst cited feedback from players and store owners who said Hasbro is over-distributing cards to drive up sales, but this could backfire in the long run if players grow tired of chasing down more and more cards.
Management recently said Magic: The Gathering was "on fire" at its recent investor day presentation a month ago. Magic is currently on track to grow into a $1 billion brand.
Hasbro expects double-digit growth from Magic for the full year, with plans to continue growing the brand. Next year, management expects its The Lord of the Rings partnership to drive higher revenue and profitability.
Investors shouldn't make a decision to sell Hasbro based on one analyst's opinion. Sometimes analysts are wrong. Magic could very well keep growing for Hasbro, given the pipeline of more partnerships in the works with leading entertainment brands.
The bigger problem for Hasbro is declining revenue across the business. The company is having a rough outing in this economic environment, while rival Mattel continues to put up stronger sales numbers. Hasbro doesn't have the look of a company that would make a good investment right now, regardless of what happens to Magic's sales.