Hasbro and Wizards of the Coast

[kabu]

I got excited about looking into Hasbro a bit, with the recent #freethewizards activism directed at the company. More on this later; first, some basic information. The text and figures may contain errors.

Hasbro is a company that owns many well-known brands. Brands familiar to many include My Little Pony, Magic: The Gathering, Dungeons & Dragons, Peppa Pig, and Monopoly.

The company has three reporting segments:

• Consumer Products: Toys under their own brands and licensed toys. Previously, for example, there was a licensing agreement with Disney, which transferred to Mattel. Nowadays, they make Marvel toys, among others. A reasonably stable business with small growth. EBIT-% ~10%.

• Wizards of the Coast & Digital Gaming: Magic: The Gathering, Dungeons & Dragons, and some other bits and bobs. An estimated 75% of revenue comes from MTG, 15% from D&D, and 10% from others. A fast-growing and very profitable segment. 2019-2021 revenue CAGR 30%, EBIT-% ~43%!

• Entertainment: TV and film production, and animations. More volatile production business. Here are the big adjustments: eOne Music was sold, resulting in a write-down, as well as a write-down of Discovery Family Channel. EBIT-% ~10%. It is worth noting that this segment was acquired in the eOne acquisition in 2019, and $4.6 B was paid for it!

The company’s “Brand blueprint strategy” tries to achieve synergies by lumping various things under one roof. The strategy seems to emphasize growth more than increasing shareholder value, which is reflected in poor acquisitions. The stock has also been stagnant for the past 5 years.

The results include many adjustments, which management can use to hide their poor capital allocation. Of course, including stock-based compensation in the adjustments is questionable, but others, being “one-time,” can be accepted. $116 M is related to the eOne Music sale and $41.3 M to the Discovery Family Channel write-down.

So, at what price can you get this treat?

Shares ~139 M
Share price $84.5
Mcap ~$11.7 B
Cash ~$1 B
Long-term debt ~$3.8 B
EV ~$14.5 B

P/E ~27
P/E adj. ~16
EV/EBIT ~19
EV/EBIT adj. ~14.6
EV/EBITDA ~13.9
EV/EBITDA adj. ~11

Now to the meat

https://freethewizards.com

Alta Fox, an activist investor, bought a 2.5% stake in Hasbro and has been pushing for a spin-off of Wizards of the Coast. Their main arguments are:

• Hasbro uses the valuable WotC as a cash cow, even though the company has very attractive investment opportunities, and WotC is growing at double-digit rates even with current insufficient investments.
• Hasbro uses the cash flow generated by WotC for poor investments and not for WotC’s core IPs, i.e., MTG and D&D.
• Investor communication is inadequate, which leads investors to view Hasbro as a toy manufacturer, even though WotC generates half of the earnings.
• WotC has no synergies with the rest of the company. A spin-off would allow WotC to invest its own cash flow into its own operations and grow faster than it currently does.
• The market currently values Wizards of the Coast, which generates double-digit growth and an EBIT margin of >40%, at an EV/EBITDA multiple of 12.3. (my own calculation from the current price, assuming others are given an EV/EBITDA multiple of 10)
• The current board, consisting of people from the entertainment and consumer products sectors, is not the right one to lead WotC.

To push for this spin-off, Alta Fox wants to change board members… And the current board opposes this. However, the WotC situation may improve anyway, as former WotC segment head Chris Cocks started as Hasbro’s CEO on February 25, 2022.
https://www.reuters.com/business/exclusive-hasbro-snubs-alta-fox-board-nominee-offer-settlement-talks-sources-2022-03-27/

Edit: Additionally, a link to Alta Fox’s slides:
https://freethewizards.com/wp-content/uploads/2022/02/Alta-Fox-HAS-Presentation-Final.pdf

[Odetus]

Good set of points! I didn’t realize WotC (Wizards of the Coast) was such a big part of Hasbro’s success. Or rather, it seems like nothing else there is really succeeding. The D&D (Dungeons & Dragons) franchise has been severely underutilized for years, even though I believe that in the right hands, it could be very valuable. I’m not that enthusiastic about Hasbro myself, but if Wizards of the Coast were spun off into its own company, I might consider investing in that.

[kabu]

Exactly. Roughly speaking, if half of Hasbro’s earnings currently come from WotC, then at least 2/3 of Hasbro’s value is WotC. A WotC spin-off would be extremely interesting precisely because of more rational capital allocation, which would likely lead to better value extraction from D&D and MTG. Hasbro’s management has shown many times that capital allocation is not their strength, even though Hasbro’s core business is also reasonably profitable.

The different question here is how likely a spin-off seems. Management’s track record regarding shareholder interest is not good, as stated in Alta Fox’s slides. No one from the current management has bought shares; trading has been solely the sale of incentive shares. The board also earns an average of $350k per year. The AF slides state that Hasbro’s board fees are higher than, for example, Apple’s.

However, one could imagine that such a well-justified path to significant value creation would interest other shareholders, so perhaps this will gradually progress, even if the initial knee-jerk reaction here was to “be quiet, we know better.” However, I wouldn’t hold my breath waiting for a spin-off.

I also added a link to Alta Fox’s slides to the original post.

[Kekkukekku]

Great thread. I also plan to take a tracking position in this stock; Hasbro has a great portfolio.

[kabu]

The story continues. Alta Fox’s proposed compromise, where one of its nominated members and one jointly selected member would be added to the board, was rejected. Instead, the board added two more members, expanding the board to 13 members at the same time discussions have been about streamlining the board.

On April 1, 2022, the Board of Directors (the “Board”) of Hasbro, Inc. (the “Company”) increased the size of the Board from eleven (11) to thirteen (13) and, based on the recommendation of the Nominating, Governance and Social Responsibility Committee of the Board, appointed Elizabeth Hamren and Blake Jorgensen to fill the vacancies on the Board created by such increase, effective as of April 1, 2022. Source: https://investor.hasbro.com/news-releases/news-release-details/elizabeth-hamren-and-blake-jorgensen-join-hasbros-board

Ms. Hamren has served as Chief Operating Officer at Discord Inc., a voice, video and text communication service that enables people to gather virtually, including while gaming, since December 2021. Prior to joining Discord, Ms. Hamren served as a Corporate Vice President at Microsoft Corporation from March 2017 to December 2021 running product and engineering for Xbox consumer products, including developing and launching the Xbox Series X|S and leading Xbox Game Pass.

Mr. Jorgensen is Executive Vice President of Special Projects at Electronic Arts Inc. (“EA”), which he joined in 2012 as Chief Financial Officer. Mr. Jorgensen has over 20 years of experience in finance across various industries with a deep understanding of finance, consumer products, technology and gaming. Mr. Jorgensen served as Executive Vice President and Chief Financial Officer of EA from September 2012 to March 2022, and as EA’s Chief Operating Officer from April 2018 to October 2021.

Since no compromise was reached, there will be a vote at the AGM to add Alta Fox’s board candidates. It’s hard to believe that would pass. However, Alta Fox commented positively on the new board members:

While we acknowledge the apparent gaming credentials of Hasbro’s recently added directors, we contend the Company needs additional change to fix the numerous issues at hand. Given that roughly 70% of the Company’s value stems from its Wizards of the Coast gaming division, we believe additional gaming experience and other skillsets are needed in the boardroom. We are also concerned by the Company’s seemingly defensive and reactionary decision to expand the Board from 11 directors to 13 directors and believe that shareholders will see through what appears to be the Company’s hollow commitment to reduce the size of the Board in the coming years. Source: https://www.businesswire.com/news/home/20220404005625/en/Alta-Fox-Comments-on-Hasbro’s-Decision-to-Initiate-a-Defensive-and-Reactionary-Board-Expansion-as-Shares-Trade-Near-52-Week-Low

It is also somewhat surprising that AF’s criticized and the board’s praised “Brand blueprint strategy” is from 2008!

[Sir_Graham]

Thanks for the excellent opening!

It’s nice to see that others are also interested in this. About 1.5 years ago, I became enthusiastic about Hasbro’s brand portfolio and considered it undervalued in monetary terms. Nostalgia also played a role (Power Rangers, etc.)

I wouldn’t judge the current strategy yet, as the eOne acquisition was relatively recent, and the pandemic also occurred, causing movie releases to be delayed. Wizards is certainly strong, and you made good points @kabu. The previous long-term CEO, Brian Goldner, passed away in 2021, which surely has had an impact.

[Ixi]

Finally, Hasbro turned on the lights and bought the digital standard of DnD into their own ownership.

https://www.geekwire.com/2022/dd-beyond-officially-joins-wizards-of-the-coast-in-146-3m-acquisition/

In this peculiar setup, all players have indeed primarily used D&D Beyond, which until now has been a separate company from Wizards of the Coast.

[kabu]

Hasbro’s Q1 results came out today: https://investor.hasbro.com/node/34361/pdf

Q1 figures showed a decline, but management slightly raised full-year guidance:

Based on our current plans, we now believe mid-single digit adjusted operating profit growth and a 16% adjusted operating profit margin is achievable on revenue growth of low-single digits

The previous guidance for this year was:

Revenue and Operating Profit Growth in the low single digits

This is likely due to an increased guidance for WotC, which is not surprising, as the previous guidance for WotC & Digital Gaming was indeed soft.

For the full-year, we now expect revenue growth at the upper end of the previously communicated growth range of mid-single digits with a potential to reach low-double digits, with adjusted operating profit margin down slightly from 42.5% in full-year 2021 as we continue investing in growing these valuable brands.

[Sir_Graham]

Good buzz. I listened to the earnings call while doing chores at home. I got the impression that the new CEO knows their stuff, but time will tell, of course.

The D&D AAA game project was new information to me (perhaps to everyone?), although I had quietly hoped for one. Hopefully, they gain good experiences from it so that other brands can also be utilized in that area.

[Ixi]

Where was this mentioned? I didn’t quickly notice it when reading the transcript.

[Sir_Graham]

It was in the Q1 report linked by @kabu.

[kabu]

“AAA video games in development” So, several. One of these is probably the licensed Baldur’s Gate 3, but it seems there’s something else in the pipeline as well.

[kabu]

Let’s put the valuation table from the Embracer thread here, where Hasbro appears. The share price here is presumably $97.98, so 10% should be deducted from these multiples to get to current ones. In addition to the multiples, it’s worth noting that Hasbro is under the “Distributors” category. This is perhaps a bit strange for a company where ~60-70% of its value comes from Wizards of the Coast, which I would not classify as a distributor.

[PeeJii]

Apparently, all sorts of other things are coming, e.g. a movie and a TV series. Hasbro Has Big Plans For DUNGEONS & DRAGONS With More Film, TV, and Video Game Projects — GeekTyrant.

It also mentions that there’s an event today where at least something D&D-related will be announced.

We will be getting more information on the future of Dungeons & Dragons later this week during the first-ever D&D Direct. This will be a 30-minute video presentation that will reveal new projects and products. The D&D Direct will take place on April 21st at 12 PM ET.

At least these details are available about the game project (outside of Baldur’s Gate) - Hidden Path, known mostly for some tower defense game (and having at least partially coded CS:GO), is developing an open-world D&D game, though there doesn’t seem to be much more detailed information about it. D&D gets a "triple-A, third-person, open-world" RPG from CS:GO co-devs (apparently the first information about this dates back to early last year, so it’s hard to say how far along it is currently).

[Dissidentti]

Hasbro currently:

• Share price: $57.4

• P/E (forward): 13

• PEG 0.65

• Dividend yield/yr 5% (dividend paid 4 times a year)

• Analyst recommendations BUY 92%

• Analyst target price (avg): $77

Analyst recommendations & target prices

Toys and games with moderate valuation

Hasbro is one of the world’s largest manufacturers of games and toys. Its products include, for example, the world’s best-selling board game Monopoly. Its toy selection includes, for example, Action Man, created as a counter to Barbie dolls, Transformers, and the less warlike My Little Pony.

The company has had a couple of difficult years as consumers cut back on discretionary purchases, such as toys and board games. Analysts have praised the company’s diligent cost-cutting and divestments. Hasbro’s investment in the highly successful Baldur’s Gate III video game also proved to be a success.

Forecasts show earnings growth, and through that, the stock’s valuation is becoming increasingly attractive. The company also pays a generous dividend: the dividend yield based on this year’s forecasts is over five percent. There was already over 40 percent upside to analysts’ average target price.

Full article from Arvopaperi (paywall)

3 edullista osakepoimintaa Yhdysvalloista – Ostopapereita löytyy, vaikka...

[Dissidentti]

Hasbro’s peer toy company Mattel reported revenue in line with expectations for the fourth quarter (Q4/2024) today. Adjusted earnings per share were significantly better than expected. Mattel’s stock is now up +17% after the market opened.

Hasbro is scheduled to report its quarterly results on February 20. The surge seems to have also affected Hasbro’s stock, which is now up over +4%.

Barbie parent Mattel shares surge on strong profit forecast despite tariff...

[Dissidentti]

Toy giant Hasbro reported better-than-expected sales and earnings in the last quarter.

The company is also introducing a new strategy.

Hasbro’s new strategy is called Playing to Win, and it continues until the end of 2027 with the goal of accelerating growth. For the period 2025-2027, the company expects average single-digit revenue growth and one billion dollars in cost savings.

“Our new strategy is based on key insights that guide Hasbro’s evolution into a modern play company: we serve fans of all ages around the world across all price points and meet fans where they play, which is increasingly online,” said CEO Chris Cocks.

https://finance.yahoo.com/news/hasbros-q4-results-trump-estimates-122209676.html

[Sijoittaja-alokas]

Hasbro exceeded expectations in revenue and also in earnings in the second quarter, and the company also raised its full-year forecasts. Magic: The Gathering set a new sales record, and digital games and licenses performed quite well, although the profitability of the gaming segment was somewhat eroded by what were perhaps slightly higher royalties than before.

Sales of consumer products and entertainment decreased, but on the other hand, familiar brands like Beyblade and Transformers grew. Hasbro reduced debt, distributed dividends, and the management itself was apparently quite confident about the strategy and the future.

https://x.com/LiveSquawk/status/1947968733995036722

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Company’s Own Materials

[kabu]

Wizards is definitely in good shape. The EBIT margin is hovering around 40-45% and growth is around 8%. EBIT growth, however, has been closer to 6% in recent years, meaning margins have suffered slightly. For comparison, I’m looking at the COVID years when a company like this was minting money.

Please disregard the negative sign of the adjustment. I had to flip those axes in Google Sheets.

Currently, TTM Wizards adj. EBIT is 734 MUSD and the rest of Hasbro’s is 177 MUSD. If one considers, for example, an EV/EBIT of 20 for Wizards and an EV/EBIT of 10 for the rest (which might be too generous), we get an EV of ~16.5 BUSD, which would imply a 20% upside from the current price.

[kabu]

Wizards’ record revenue is, as expected, due to the strong sales of the Magic the Gathering x Final Fantasy crossover: