Hasbro (NASDAQ: HAS) Is A 2nd-Half Winner Trading At A 10% Discount

The Second Quarter Was Not Pretty

Hasbro (NASDAQ: HAS) just reported results for the 2nd quarter and it isn’t pretty. You’d think the company was perfectly positioned for the pandemic, toys and games should be in high demand, and you’d be right if not for one thing. The pandemic came at a time in Hasbro’s yearly cycle when inventory levels are low and wreaked havoc on the company’s supply chain. The demand was there, Hasbro just wasn’t able to meet it.

Brian Goldner, Hasbro’s chairman and chief executive officer. "The second quarter was much as we expected: strong point of sale for Hasbro brands countered by a very challenging revenue period due to global closures in our supply chain, across retailers as well as in entertainment production. We believe the outlook improves from here. Consumers - children, families, fans and audiences - are relying on Hasbro brands and stories to connect and entertain themselves throughout this period.

Pent-Up Demand Will Drive Results In The 2nd Half Of 2020

Here’s the bad news. On the top-line, Hasbro’s revenue fell -29% across the company’s footprint. GAAP EPS of -$0.25 also missed by a fair margin while adjusted EPS came in at $0.02. Regarding adjusted EPS, it missed by near a quarter. Net margins, already tight for the company, shrank to 5% due to inefficiencies of scale relative to product availability.

Here’s the good news. While sales of licensed products and media suffered for the quarter there were some bright spots. Games, the company’s core business if not its largest segment, saw revenue surge 11%. The company reports high demand in most of its top-selling names including Monopoly, Jenga, Connect Four, Mouse Trap, Twister, and Magic: The Gathering. Also of note, a 30% spike in eCommerce sales that would have been higher if not for the supply chain hiccups.

Looking forward, the company says its rebound is already underway. Most of the company’s factories and warehouses are open with only limited disruptions reported. CEO Brian Goldner says, barring unforeseen events, Hasbro should be able to catch up with lost production by the end of the 3rd quarter. The entertainment segments will take a bit longer to catch up but should produce robust results in calendar 2021.

"We have a strong entertainment lineup for 2021, through internally developed as well as third-party entertainment. We will also begin to see a greater benefit of synergies from the acquisition of eOne as we remain on track to deliver against our plan of $130 million in synergies by year-end 2022,"

The Dividend, Growth Is Over But Payments Are Safe

Hasbro is one of many companies to suspend dividend increases during the pandemic and smart for them. While it is unlikely we’ll see another dividend increase within the next four quarters the current payout is safe enough to sleep soundly at night. With share prices near $70 the yield is near 3.8% so definitely of interest. The company has some debt but that, and the 2nd quarter weakness, is more than offset by the cash position, liquidity, and free-cash-flow.

Hasbro ended the second quarter with $1.0 billion in cash, more than enough to cover near-term needs. The Company's $1.5 billion revolving credit facility is also available and Hasbro is well within its financial covenants for the $1 billion term loan and revolving credit facility. The next major debt maturity is $300 million in May 2021.

“The Board remains committed to the dividend. Hasbro paid $93.1 million in cash dividends to shareholders during the second quarter of 2020. The next quarterly cash dividend payment of $0.68 per common share is scheduled for August 17, 2020, to shareholders of record at the close of business on August 3, 2020.”

The Technical Outlook: A 10% Discount To Friday’s Prices

Shares of Hasbro made a nice rebound from the March lows but have been struggling with resistance well below the pre-COVID highs. The 2nd quarter results are more than a reason for such a tepid response but not, I think, enough to keep this stock down. Today’s news has the price action down about 10% in the pre-market action but that is more knee-jerk reaction and short-term bearishness than anything else. This company is set up for a strong second half in 2020 and the outlook for 2021 is shaping up nicely.

The risk for investors today, technically speaking, is support at the bottom of the June/July trading range. If price action falls below this level and fails to recover it quickly shares of Hasbro could be in for a much deeper decline. If they do all the better: if a 10% discount is good a 15% or 20% discount on a 3.75% yielding cash-flow machine is excellent. But I wouldn’t count on it.