Summary
- There's ample growth opportunity in FY-21 as the entertainment, licensing, and digital segment bounces back.
- However, that may be tempered by short-term headwinds both internal and external.
- The medium-term future shows strong revenue and earnings growth potential, but the market's reaction to Q3 and multiple short-term risk factors could open up a better entry point.
Hasbro, Inc. (NASDAQ:HAS) earlier this week announced Q3-20 earnings that beat expectations at the top and bottom. The company reported in-line GAAP earnings of $1.61 and adjusted earnings of $1.88 for a 17% surprise over the expected $1.61. Despite this and the revenue beat of $40 million, the stock has lost significant ground in the last two days, initially dipping by about 7% and currently trading at around $85 as of this writing.
Thesis
There's ample growth opportunity in FY-21 as the entertainment, licensing, and digital segment bounces back, driven by a more normal cadence of releases. However, there is more than one indicator that points to the depressed growth of multiple segments in the short term. For now, the only bright spots appear to be the Gaming and Franchise Brands segments, with Emerging Brands and eOne TV/Film/Entertainment continuing to be a significant drag on revenue growth, but the company continues to "believe that we could grow revenues and adjusted EPS from our pro forma Q4 results of 2019 overall as a company, because well eOne and the live action production that's returning, we've been in production on animated overall training for better deliveries."
Nevertheless, investors might find it prudent to wait until these and other variables play out, primarily because of the magnitude of uncertainly around the economy over the holiday quarter and its potential impact on the company's Q4 performance.
Internal and External Indicators
The major hit in Q3-20 came from delivery delays in live-action production due to shutdowns. The tail-end of Q3 saw some locations return to production, but there will be a significant revenue shift to FY-21, as indicated by content spend now being estimated at the lower end of the $450 to $550 million guidance. Per CFO Deb Thomas at the Q3 earnings call:
Due to the timing of this return to production, certain deliveries expected in the fourth quarter 2020 will move to 2021, shifting expected revenue. We currently expect next year to have a more normalized cash spend level as production and deliveries are slated to improve from the lower 2020 levels.
Of the "30 brands and more than 40 projects stood up", some are slated for Q4 delivery, which should help the company recover considerably in eOne revenues as we move through the next two quarters; however, we should still expect to see a decline over Q4-19 pro forma numbers in that line item. As such, investors should look for sequential revenue growth in the eOne TV/Film/Entertainment segment from Q3-20 through Q1-21, which will indicate a gradual return to normal production levels.
That said, there could be further production delays in several locations due to the increase in the number of daily positive COVID-19 cases in the United States. Although a nationwide lockdown is still legally questionable, the chance of states implementing specific restrictions looms large as the holiday quarter progresses. With the American public already having protested large-scale stay-at-home orders in the past, state Governors will have to make some tough decisions over the holidays.
