Down 45% The Past 3 Years, With The S&P Up 25%, What Next For Hasbro Stock?

[Note: HAS’ fiscal year 2022 ended December 25, 2022]

Hasbro (NASDAQ: HAS) is one of the largest makers of toys and games. The toymaker is known for brands like Transformers and board games like Monopoly. The company’s stock currently trades at $50 per share, around 52% below its level of $104 seen on January 4, 2022 (pre-inflation shock high), and has the potential for gains. However, the company’s large debt obligation presents a risk to this upside. Lower demand across the business has pressured Hasbro’s profitability since last year, which has weighed on the stock. Hasbro reported net revenue of $1.5 billion in the recent Q3, which was down 10% year-over-year (y-o-y). It also saw diluted earnings per share of -$1.23 in Q3 2023 compared to 93 cents per share in Q3 2022. However, the company’s adjusted net income rose 16% y-o-y to $228 million, i.e. $1.64 per share in adjusted earnings. Retail conditions are tough right now, and the toymaker predicted the crucial holiday quarter might not turn out as well as expected. Management lowered its guidance for FY 2023 due to the weak performance in consumer products. It now sees total revenue falling 13%-15%, compared to an earlier forecast of just a 3%-6% decline. It expects a drop of 25% to 30% in the entertainment business and a moderation of growth in the digital gaming segment. While Hasbro continues to transform its business to focus on profitable growth, it faces a long road ahead.

HAS stock has suffered a sharp decline of 45% from levels of $95 in early January 2021 to around $50 now, vs. an increase of about 25% for the S&P 500 over this roughly 3-year period. Notably, HAS stock has underperformed the broader market in each of the last 3 years. Returns for the stock were 9% in 2021, -40% in 2022, and -18% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 23% in 2023 (YTD) – indicating that HAS underperformed the S&P in 2021, 2022, and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including AMZN, TSLA, and HD, and even for the megacap stars GOOG, MSFT, and AAPL. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could HAS face a similar situation as it did in 2021, 2022, and 2023 and underperform the S&P over the next 12 months – or will it see a recovery?

Returning to the pre-inflation shock level means that HAS will have to gain about 108% from here. While it has the potential to recover to those levels, we estimate HAS’ Valuation to be around $44 per share, almost 8% lower than the current market price. Our detailed analysis of Hasbro upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022 and compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers were unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
• April 2021: Inflation rates cross 4% and increase rapidly
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declines more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
• October 2022 – July 2023: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses
• Since August 2023: Fed keeps interest rates unchanged to quell fears of a recession, although another rate hike remains in the cards.

In contrast, here’s how HAS stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

HAS and S&P 500 Performance During 2007-08 Crisis

HAS stock declined from nearly $30 in October 2007 (pre-crisis peak) to around $23 in March 2009 (as the markets bottomed out), implying that HAS stock lost almost 23% of its pre-crisis value. It recovered from the 2008 crisis to levels of around $32 in early 2010, rising roughly 40% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

Hasbro Fundamentals Over Recent Years

HAS  revenues grew 36% from around $4.7 billion in FY 2019 to about $6.4 billion in FY 2021, due to the impact of Covid-19. However, sales fell to $5.9 billion in FY 2022 due to softer industry trends. Earnings per share declined from around $4.09 in FY 2019 to $3.11 in FY 2021 and fell further to $1.47 in FY’22. The reason for this decline was inflation curbing consumer spending and a tougher macro environment across the toys and entertainment sector.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe HAS stock has the potential for strong gains once fears of a potential recession are allayed. That said, the pressure on the company’s balance sheet remains a significant risk factor to the realization of these gains.

It is helpful to see how its peers stack up. HAS Peers shows how Hasbro stock compares against peers on metrics that matter. You will find other useful comparisons for companies across industries at Peer Comparisons.

[1] Month-to-date and year-to-date as of 12/14/2023
[2] Cumulative total returns since the end of 2016