Today we have a speculative idea: take shares of toy manufacturer Hasbro (NASDAQ: HAS), in order to capitalize on potential structural changes in his business.
Growth potential and validity: 18,5% excluding dividends behind 18 Months; 55% behind 3 years excluding dividends. In both cases, the possibility of separating one of the company's divisions into a separate issuer is taken into account..
Why stocks can go up: because Wizards of The Coast could become a separate issuer – more below.
How do we act: we take shares now by 85,50 $.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
No guarantees
Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.
And what is there with the author's forecasts
Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.
So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.
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Investment editorial office
What the company makes money on
The company makes toys and board games. The magazine has already published a review of the company's business, let's repeat only the main points:
- Hasbro has its own production, but the bulk of the goods for it are produced by third-party companies.
- The main sales the company makes in the USA.
Arguments in favor of the company
Fell down. Since the beginning of the year, the company's shares have significantly fallen in price: from 101 to 85,50 $. Think, that given the points described below, we can expect a rebound.
Activism Time. Hasbro is the target of a campaign by an activist investor from Alta Fox Capital (AFC). AFC wants, for HAS to move wizards of the Coast into a separate issuer. Wizards of the Coast is magic board games: The Gathering и Dungeons & Dragons and video games based on them.
That's a good idea., and that's why: Wizards of the Coast is Hasbro's most marginal division. Its operating margin is 42,5% from its proceeds. The toy segment has an operating margin of 10,08%, and the media segment has been generally unprofitable for the past few years.
At the same time, Wizards of the Coast shows excellent revenue growth rates - higher 40% in year. SHARES HAS latest 5 years treading water, so the position of the AFC seems to me very strong and the chances of success are very high.. So I think, that taking these stocks with an eye to benefiting from the separation of Wizards of the Coast is a good idea.: I think, that the growth of shares of a separate Wizards of the Coast can be very frisky. Or at least investors will start buying shares of HAS in anticipation of getting a stake in the more interesting Wizards of the Coast..
Dividends. HAS pays 2,8 $ per share per year, what gives unashamed 3,28% per annum. This is well above the average dividend yield on S&P 500 and can catch up in the company's shares a lot of fans of "hardworking money". This, certainly, not the main argument in favor of these shares, but it should still be taken into account.
What can get in the way
Concentration. A number of the largest U.S. retail businesses are the most important distribution channel for Hasbro - as a percentage of revenue: Walmart — 13%, Amazon — 11% and Target — 8%. A review of relations with one of them can hit the company's reporting..
Accounting. The company has a fairly large amount of debts: 6,95 billion, of which 2.455 billion need to be repaid within a year.
Basically, money at the disposal of HAS - 1.019 billion in accounts and 1.5 billion debts of counterparties - is enough to do so., to pay off urgent debts. But still a large amount of debt, coupled with the fact, what HAS spends on dividends 90% its — not growing — profits for a long time, plays against dividend investors: payments may well cut, what will cause stocks to fall. Especially if HAS does not bend under the AFC and even decides to strengthen the development of a loss-making media segment at the expense of money., who will save on dividends.
Logistics. Most of the company's production contractors are located in China, and that's the trouble.: there's just a new large-scale quarantine, which greatly complicates the production and transportation of goods. Considering that, that even before the news, a large number of U.S. companies had complained about logistical problems — and in the consumer goods segment, where HAS is obtained, also to reduce margins, — I wouldn't expect anything particularly good for the company's reporting in the next couple of quarters..
Licenses and competition. A significant role in the company's business is played by toys licensed by other companies such as Disney., which accounts for almost a quarter of HAS's revenue. Licenses may not renew: Disney recently gave the right to make toys from the Disney princess line to competitors HAS from Mattel.. License reviews will beat on the company's reporting.
You don't have toys here.. If not for the AFC's actions on wizards of the Coast, then I wouldn't even think about HAS. Her toy business is stagnating, And, Unfortunately, modern children spend more time playing video games, not for toys. Frankly speaking., that me, as an investor, separate Wizards of the Coast more interesting than all HAS.
Not expensive, but not cheap either. HAS is not that very expensive: P / S — 1,92, P / E — 28,75. But it doesn't look underrated either..
What's the bottom line?
Shares can be taken now by 85,50 $. And then there are two options for the development of events:
- we are waiting for the price to be returned to 101 $. Think, what are the next 18 months we will reach this level. For example, Wizards of the Coast will become a separate company and the growth of its shares will give the expected result in the aggregate. Or the wizards of the Coast will at least be announced., and investors will appreciate this news;
- hold shares for three years. Great chances, that during this time Wizards of the Coast will become a separate company and its quotes will be able to grow strongly.
The main risk is that hopes for the separation of Wizards of the Coast will not be justified. And other growth drivers, except dividends, HAS shares do not. The problem here is, that there is no clear timeline, after all, AFC's struggle with HAS management can drag on for years.
AFC May Not Achieve Wizards of the Coast Allocation, but in a year, HAS management can come to this decision on its own.. Or there will be a compromise option.: AFC will lead its people to the HAS board of directors and will work on the development of Wizards of the Coast as part of a single company..
The only thing, what can calm us down, — HAS gives a fairly large level of dividend yield, and if it does not reduce payments for this time, then the stock will not fall much.
All in all, here we throw cubes, but we don't know, what awaits us after the throw.
Be sure to look at the news section on the company's website: may be, we will have time to sell shares on SPb-Exchange before then, how the U.S. market will digest the news of dividend cuts. However, until SPb-Birzha returns to normal operation, we will not be able to realize our temporary advantage.
