Hasbro Grabbing Market Share
We're maintaining our $98 fair value estimate and view shares as modestly undervalued today.
Hasbro’s (HAS) brands continue to gain relevance among consumers, as indicated by the robust takeaway at retail that has persisted. The company noted double-digit takeaway globally at retail, ahead of its 7% wholesale revenue growth in its third quarter, which we believe is significantly faster than industry growth. For the full-year 2017, NPD has forecast toy industry growth of 4.5%, with second-half industry increases around 5%. At the low end of Hasbro’s fourth-quarter sales guidance, which calls for a 4%-7% revenue increase, the company would be able to capture nearly 6% full-year growth, indicating its brand and marketing efforts are paying off, supporting our narrow economic moat rating. Given that our model had already implied 7% top-line growth in the fourth quarter, we don’t plan to make any material change to our $98 fair value estimate and view shares as modestly undervalued, trading around 17 times our 2018 estimate. We think today's share reaction is attributable primarily to near-term pressure on operating margin from the Toys 'R' Us relationship, which should be transitory in nature.
While Hasbro has done an incredible job of innovating and monetizing its franchise brands (with the August investor day highlighting even more ways to capitalize on improving mix), our thesis since 2015 has been that growing top line off an elevated base becomes more difficult over time, as Hasbro clocked significant top-line gains in 2015-16 from Star Wars: The Force Awakens with sales rising 13% in the fourth quarter of 2015 and 13% in 2016. In this vein, our long-term sales growth forecast normalizes around 5%, implying share gains continue (NPD pegs global growth through 2021 at 3%). Furthermore, we anticipate modest operating margin gains (around 20 basis points annually) as mix shifts to capitalize on more digital and content trends, plateauing around 18%.
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Jaime M. Katz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.