Description

Company: Hasbro (HAS)

Thesis:

·       Combined HAS/EONE Earnings Power - worth more than stand-alone. HAS is pointing to $130mm of cost savings beginning in 2021. Synergies will add close to $1/share in EPS on (pre-synergies EPS of $4.40/share)

·       Recession Resilient and Seasonal Business – The toy industry was down -2% in 2008. Toys are a low-cost entertainment solution for children. Baby Yoda pre orders +10% pre-COVID vs. expectations. 4Q is HAS’s largest quarter, which somewhat insulates it from 1Q COVID problems.

·       Liquidity to Survive – HAS is levered 3.5x net before synergies ($130mm), including $1bn of cash on their balance sheet and $1.25bn of revolver capacity. Next maturity is $300mm in 2021 ($1bn in cash on B/S).

·   Depressed Valuation ~ We are currently at $4.40/share for 2020. This doesn’t include any benefit from COVID (board and card games). HAS is trading at close to 10x P/E currently before any synergies. Including the $130mm of synergies (2 more years) plus the potential for revenue synergies (cross-selling), we can get close to $200m of synergies (albeit year 2/3 vs. in year). Assuming modest core HAS/EONE growth, we can get to $6/share in earnings. Pro-forma for this, valuation is currently 8.5x P/E ($600mm of FCF per year) with a 5% dividend yield

·   Repeatable Algo at HAS – but HAS paid a big price for EONE (pre-synergies) and needs to execute. Contracts in-house will be coming in 2H21.

Target Price & Methodology: Target price of $100/share —50% upside based on 18x FY22 EPS of $5.50 (synergized with no core business improvement). Downside of $4.40/share in EPS (10x EPS) ~ $44/share. $21/share downside vs. $35/share upside. 1.6x risk/reward

Catalysts

1)      Content Platform Growing & Demand Rising – With the addition of Peppa and EONE’s TV studio, HAS can increase its exposure to creating more content for SVOD. They also become vertically integrated with EONE’s studio, which should reduce costs going forward and allow HAS to control the production schedule.

2)      Synergies are Longer-Dated, but appear Straightforward – 2/3rds of synergies are toy in-sourcing. These synergies will begin to hit in 2H21 given that HAS doesn’t want to break these contacts b/c it is not worth it. The 1/3rd of the announced cost savings is coming from HQ reductions and other redundancies.  There is potential for additional cost savings and revenue synergies from cross-selling opportunities.

3)      Valuation at Lows – HAS is trading at 11x P/E currently a discount to its 10-year average (16.5x). This is pre-synergies, which can add $1/share to EPS starting in 2H21.

4)      Winner in COVID Recession —Based on our checks, the open retailers are TGT, WMT, BJ, COST and AMZN are seeing “double digit” increases in board games/card games. Adults are looking for activities that they can “do from home” while kids (home from school) are being bought toys. Mom is going to these retailers to stock up and buying toys for their children as well.

5)      Estimates are not going down, but rather need to go up – The problem with HAS pre-COVID was that that they hit an air pocket (the whole 2020) on EONE synergies and investors didn’t want to pay 20x for a synergy story that was so back end loaded. With COVID, HAS is able to use the benefit received to 1) deleverage faster 2) reverse estimates going down (30% of HAS pro-forma is growing double digits currently) and 3) highlight the resiliency of the Toy business.  

COVID +/- Takes (Appendix)

-          What % of HAS biz getting hit (negatively)?

o   $6.2bn total sales.

o   $2bn EONE

§  15% in traditional film (-) ~ getting smaller by design already

§  5% other (music, labels)

§  40% Peppa Pig Content and Licenses (Family brands and entertainment) ~ fine

§  40% TV Segment Episodic (+) ~ 60 shows in development right now. Post Production right now ~ the most of them. What isn’t happening right now is the launch of the 2020 cycle of new content production (the pipeline for 2021). 2021 hit if you can't get into the production cycle.

o   $4.6bn core HAS Legacy

§  20% in games (including digital) (+)

§  10% outdoor and active (Nerf ~ spiking post school cancel) (+)

§  30% Action Figures (Marvel, Star Wars, Baby Yoda) (-) down MSD ~ built in ~ lapping avengers)

§  5% Craft & Play Do (+)

§  10% Collectibles (limited edition) (always up)

§  25% Dolls (Disney Princess, Frozen) (down)

-          What % of retailers are still open? 87% of retailers are still open. GameStop and Best Buy (doing roadside pickup).

-          Online D&D and Magic Gathering Impact? As of Sept 2019, can register for Magic Arena (buy packs of cards and go online and play ~ direct revenue tied to features bought). Working with Epic Games store (takes 20% cut). D&D is in development. Fall 2020 release.  

-          Video Games doing trending? No video game launch 2020

-          China Supply Chain ~ fully back up/negative impact? 85% back up. 100% most likely by mid April.

-          What were toy sales down in 2008? Down 2%. Industry down -1.8%. One of HAS’s categories was -24% (lapping Furbi). Ex that it was up.

-          Investor Sentiment? People are dusting off their models today.

-          Decremental Margins ~ 6% drop in sales would be a 15% in EPS ($4.32 consensus)

-          Synergies Cadence? Doing some headcount reduction and reinvesting this back in the business. So you have some synergies, but no flow through. EONE had a ton of 3rd party agreements via licenses with agents. HAS has its own agency that will capture this value.

Catalyst

Covid boost to legacy business

EOne synergy ramp cost plus cross selling opportunity 

Debt Paydown

High dividend yield

Return to sharebuybacks in 2021