Morningstar - Q2 2024 - 47

A Strong Core
Hasbro's renewed focus on its core strengths should support
profit expansion.
Jaime M. Katz
BEST IDEAS: EQUITY
This article is adapted from a Morningstar equity research report dated
March 1, 2024.
Hasbro HAS continues to hold a leading position in the nearly $30 billion
North American retail toy industry, developing, manufacturing,
and marketing well-known global brands that include Transformers, My Little
Pony, and Nerf. The firm operates a relatively differentiated business
model, thanks to its digital properties exposure, content creation ability,
and key licensing arrangements, which can be better monetized
now that it has divested its Entertainment One (EOne) entertainment-related
assets. Production capabilities support Hasbro's multimedia presence,
as does Discovery Family, a joint venture that brings Hasbro's brands
to television, bolstering the firm's brand blueprint strategy. Hasbro has
historically dominated the big screen, building brand loyalty and generating
new streams of revenue from its licensing businesses, such as Star
Wars and Marvel. We think Hasbro and the toy industry have a modest runway
for growth ahead through international expansion (Asia-Pacific and
emerging markets still provide longer-term potential through share gains)
and acquisitions of strategic players that fit into Hasbro's portfolio
(most recently D&D Beyond).
We rate Hasbro's moat as narrow; it is a market leader with a differentiated
niche in the entertainment space. It also has rich exposure to games
through the Wizards of the Coast line, where peers have failed to erode
share, given the history of player loyalty in the category. However,
the strong returns on invested capital that Hasbro generates will continue
to attract competition, which will force it to continuously innovate
to maintain its leading position, resulting in elevated development costs.
We view Hasbro's shares as significantly undervalued relative to our
$84 fair value estimate and contend that the weak performance reflects
a business in transition that has faced idiosyncratic risks in 2023,
such as slower entertainment growth owing to the writers strike and
the overhang from the pending sale of the majority of the EOne production
business, which was completed in December 2023. With Hasbro now
largely liberated from the low-margin EOne segment, we expect a solid
lift from an improved revenue mix, with the high-margin Wizards
of the Coast and digital segment set to represent around 35% of sales
in 2024, from 29% in 2023.
Hasbro HAS
Stats 03/31/2024
Morningstar Rating
QQQQQ
Price
$56.52
Economic Moat
Narrow
Price/Fair Value 03/31/2024
$120
90
60
30
04/2021
04/2022
04/2023
Fair Value
Estimate
Per Share
84.00
Month-End
Closing Price
56.52
Sector
t Consumer Cyclical
Fair Value Estimate
$84.00
Capital Allocation
Standard
Industry
Leisure
Uncertainty
Medium
Market Cap
$7.84 Billion
With a renewed focus on core strengths, we think Hasbro stands to benefit
from more-concentrated innovation and a streamlined operating model-
helped by the licensing of less-productive brands to partners, which should
help free up working capital. Additionally, thanks to a stringent focus on
expenses, Hasbro is set to reduce its gross costs by $750 million by the end of
2025, supporting profit growth. Hasbro forecasts a 20% operating margin
by 2027, but we think it can reach it by 2025, with long-term operating margins
stabilizing around 23%-24%. As such, we think Hasbro can outperform
expectations given its renewed focus on product innovation, cost management,
and a lean operating profile. K
Jaime M. Katz, CFA, is a senior equity analyst for Morningstar Research Services LLC.
morningstar.com/products/magazine
47
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