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With the Toys ‘R’ Us Bankruptcy, is it Time to Buy Hasbro?

Tuesday, March 13th, 2018

The struggles of Toys ‘R’ Us continues to make one wonder if the name will be around in the years to come. After announcing bankruptcy last year, the company had a liquidation plan to enable its debt repayments and stay in operation. That plan does not seem to be succeeding as the company has stopped making payments without any explanation. It has also failed to negotiate settlements with vendors on money it owed prior to the bankruptcy. This is concerning especially when paired with the substantial debt load of $5 billion.

While investors cannot invest in Toys ‘R’ Us directly, several companies stand to be impacted by a complete liquidation of Toys ‘R” Us. Major toymakers such as Mattel and Hasbro have longstanding relationships with the toy retailer and the closing of Toys ‘R’ Us stores could have a short-term impact on the toy makers’ revenue. However, longer term I believe the impact should not be material given the companies and their quality brand names. If consumers still want to buy a Barbie doll they will buy a Barbie doll, it just won’t be from Toys ‘R’ Us.

While conceptually the companies should do just fine over the longer term it is important to make sure they have strong fundamentals before considering an investment.

Looking closer at Hasbro (HAS), the company has many quality brand names your children will recognize or which you’ll recognize from your childhood. This includes names such as Connect 4, Chutes and Ladders, Battleship, Nerf, Monopoly, Play-Doh, and many others. The company’s stock has been recently under pressure and has a current price of $89.35 which is near its 52-week low of $87.92 and off its 52-week high of $116.20.

While I am excited by the recent pullback in the stock price, it is still important to check the valuations to make sure you are getting a good value. Just because a stock price drops, does not make it a good value company. The current Price/Earnings of 16.4 comes in favorably against an industry average of 26.0; Price/Sales of 2.2 is double the industry average of 1.1; and Price/Cash Flow of 12.9 is less expensive than the industry average of 14.9. I was surprised to see Hasbro has a Price/Tangible Book Value of 10.8. While it is more expensive than the industry average of 9.9, many times companies with a plethora of brands come with a tangible book value that is not material. Overall, I am not necessarily excited by the valuations, but I am also not scared off by them.

Investors do receive a nice dividend yield of 2.8% and the company uses just 41% of its earnings to pay out that dividend. I am comfortable with that payout ratio as it leaves the company ample room to continue investing in its business.

Sales have increased 3.8% over the last 12 months and EPS has increased 26.8% over the same time frame. In 2017, Toys ‘R’ Us accounted for approximately 9% of Hasbro’s overall sales. With Toys ‘R’ Us having a material amount of Hasbro’s sales, if the stores are liquidated sales growth rates for Hasbro could suffer this year.

The current ratio of 2.9 shows the company has plenty of liquidity, but a debt/equity of 101% is a level I begin to be concerned with. I would want to know if Hasbro is planning on repaying that debt or if they plan on taking on more debt.

Looking forward to December 2019, estimated GAAP EPS of $5.79 would give me a target sell price of $95.54. That is an estimated return of approximately 7%. I like to have a nice 30% margin of safety before buying a company. Hasbro, has some strong fundamentals and could warrant a deeper look if the stock price takes a continued hit from the Toys ‘R’ Us concerns.

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