We still have a small “position” in the emerging licensing giant in the Dividend Growth Newsletter portfolio, having removed 75% of the “stake” in August.
By Brian Nelson, CFA
On August 18, 2017, we released the following email notification alert on Hasbro (HAS) to members, “ALERT: Newsletter Notification and Website Changes:”
Dividend Growth Newsletter portfolio — page 3 of the September edition here (pdf)
We are removing 75% of our position in Hasbro from the Dividend Growth Newsletter portfolio, or 82 shares at $96.54. Hasbro’s cost basis in the newsletter portfolio is ~$32. The company’s performance has been absolutely phenomenal.
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Download Dividend Growth Newsletter transaction log here (not updated for notifications in this email).
In August, we thought it made sense to take a large portion of one of the largest positions in the Dividend Growth Newsletter portfolio off the table, and it turns out we were right. Shares of Hasbro sold off aggressively during the trading session October 23, despite a solid earnings beat. We continue to like Hasbro, but as always, we pay close attention to valuation–and frankly, shares weren’t cheap before the release of the quarterly results, and that’s why we took some off the table a few months ago. Readers should not be surprised by the sell-off as valuation matters…eventually. Hasbro’s shares are up tremendously during the past several years.
Hasbro is not a “toy company,” per se, as much as it is an emerging licensing/brand powerhouse. We think this is partly why shares have done so much better than rival Mattel (MAT) lately, though Disney’s (DIS) Frozen princesses having taken significant share from Mattel’s Barbie has helped, too (share that may not return to Mattel). Hasbro’s third-quarter revenue advanced 7% as the company returned $164 million to shareholders during the quarter ($71.4 million in dividends and $92.9 million in share repurchases).
During the period, Hasbro’s operating profit was essentially flat at 20.1% of net revenue, but management did allude to the Toys “R” Us bankruptcy filing as impacting quarterly performance. Toys “R” Us has already received debtor-in-possession financing, but we think the view that Hasbro may still be meaningfully tied to its physical-toy-company roots may be what has investors spooked. From Hasbro’s third-quarter report:
As a result of the Toys”R”Us bankruptcy filing in the U.S. and Canada, there was a negative impact on our quarterly revenues and operating profit. However, our multi-platform content strategy, combined with an industry leading investment in innovation and an omni-channel commercial approach, is driving strong consumer takeaway heading into the holiday season as consumers engage with Hasbro brands across a multitude of experiences…
…The quarter presented several obstacles, but the team delivered with higher revenue and earnings, as well as executing nearly $93 million of share repurchases…We are well positioned for the holiday, including good quality inventory at Hasbro and at retail, backed by strong consumer momentum. We continue to work closely with Toys“R”Us as we head into the holiday period. Given our new view to the holiday based on Toys“R”Us and the economic outlook in certain markets, our updated expectation is fourth quarter revenues will increase in a range of 4% to 7% versus the fourth quarter 2016.
The forward guidance for revenue was a little lighter than what the market had been anticipating, but 4%-7% growth isn’t bad by any stretch. As we noted, the market may be getting a little nervous about its dependence on Toys “R” Us, even as it transitions its operating earnings away from physical-toy dependence in growing its ‘Entertainment and Licensing’ business. During the period, for example, the company’s higher-margin ‘Entertainment and Licensing’ segment grew revenue 4% as it leveraged such a gain to a 20% operating-profit increase. The division’s operating margin came in at nearly 29% of net revenue in the quarter, up 3.8 percentage points. We still like the Hasbro story, but stocks can’t go up forever. We think the “profit-taking” in August was well-timed.
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