Hasbro’s Management Made All the Right Calls This Quarter

Key Points

• The market reacts to Hasbro's recent earnings announcement by bidding up the stock.
• Fundamentals show management is making the right calls to turn the business around.
• EPS Projections indicate Hasbro could be head and shoulders above its closest competitor.

After announcing the first quarter 2024 financial results, arguably the most critical quarter of the year as it sets the tone for any stock, shares of Hasbro Inc. NASDAQ: HAS jumped by as much as 12%. 

With Mattel Inc. NASDAQ: MAT also rallying on earnings and flirting with new 52-week high prices, momentum seems to favor the toy industry, and it could last well beyond the holiday season this time around. As the economy becomes more globalized, securing intangible assets through rights and patents is more important than ever, something Hasbro’s management has made a priority.

Wall Street remains bullish on Hasbro, as this consumer discretionary stock shows signs of turning around. 

Hasbro’s Near Top of The Range

As of the fourth quarter of 2023, Hasbro owned 43.6% of the recreational products market share, while competitor Mattel owned 47.4%. Apart from these two, no other company poses a real threat of intrusion. Market share dominance typically shows through gross margins, and Hasbro’s stood at around 48%, matching those of Mattel’s.

The main difference between these two market leaders lies in their balance sheets. Mattel's balance sheet shows a total debt of 56% of its assets, while Hasbro's debt is much higher at 77%, as of the past 12 months. 

Because the Federal Reserve (the Fed) is looking to cut interest rates this year, companies with higher amounts of debt on their balance sheets may see an earnings per share (EPS) boost. Since more debt typically means more interest expenses, lower rates could significantly cut these costs and raise earnings. According to the CME’s FedWatch tool, these cuts could come as soon as September 2024, giving investors enough time to consider a second look into Hasbro. 

Management Is Making The Right Calls

According to the company’s earnings presentation, inventory levels were reduced by 53% over the year, as the business segments show that the digital space is now taking over profitability. Consumer products revenue declined by 21% over the year, showing an operating loss of $47 million. On the other hand, Wizards of the Coast and Digital Gaming segments brought 7% revenue growth and a net operating profit of $123 million. Inventory reductions mean more free cash and fewer cost burdens as management focuses on profitable segments like digital.

Management plans to cut $750 million of gross cost savings by 2025. Up to 50% of these savings would feed through the bottom line. In other words, there would be $375 million in net earnings to boost EPS. While these goals may seem a little bold, management is sending a resounding message.

Offering an annual dividend yield of 4.3% couldn’t be done if management didn’t think the company’s financials could allow it. This yield would allow investors to beat stubbornly high U.S. inflation rates and almost match today's 10-year treasury bond yield of 4.6%. 

Wall Street’s Take

As Wall Street analysts expect to see 18.4% EPS growth this year, it would seem the markets think a stronger 2024 is ahead for the company. By comparison, Mattel has a 10.2% projection.

The forward P/E ratio also shows investors how Hasbro commands a premium over Mattel’s future earnings valuation; Hasbro’s 17.2x forward P/E calls for a 36.5% premium over Mattel’s 12.6x. 

Hasbro stock’s institutional quality remains high, as institutional ownership currently stands at 91.8%. In fact, over the past 12 months, the stock saw $1.9 billion in institutional inflows (which represented nearly 20% of the company’s market capitalization). 

Considering the stock trades at 88% of its 52-week high, investors can see how bullish momentum confirms these fundamental trends, aiding the company's future valuation. As long as management keeps making the right calld, Hasbro may be top choice for investors this year.