We are long-term bullish on Hasbro, Inc. (NASDAQ:A), although stocks may trade in a range for some time to come. As we can see from the long-term chart below, stocks are now coming up against long-term support which should at least put an end to the sales we have seen in recent months. Given the spike in implied volatility in Hasbro and how implied volatility is trading well north of historical volatility (which is what we want), we are short iron condors expiring in the cycle of October and which are slightly biased upwards (global long delta position) . We want this strong lower resistance to keep Hasbro on the side for the next two weeks.
We believe that at least a break in the sell-off (if not a rally) has a good chance of occurring here due to the length of this decades-long trendline. Remember that the ramifications of recent acquisitions, higher inventories and possible restructuring have been fully digested by the market at this point.
These positions aim to take advantage of theta decay as well as a potential decline in overall implied volatility. When that drop will take place is another question, but we’ve put the odds in our favor for it to happen by not trading this strategy during any of Hasbro’s earnings announcements. Hasbro is then expected to announce its third quarter results on October 24. The expiration date for our iron condors is October 21 (3 days earlier).
Suffice it to say, this is downside protection from our perspective (due to the fact that the sell spreads are closer to Hasbro’s stock price compared to the corresponding buy spreads ).
Here’s why we think Hasbro is staying in shape. We’ll start with the company’s profitability trends.
Hasbro reported a second-quarter profit overrun and the full-year guidance was maintained. Although Hasbro is expected to show lower profitability over the next few years (8%+ CAGR EPS vs. 11%+ over the past 5 years), core profitability has remained strong, as seen in company margins. Hasbro’s gross margin measure averages nearly 50% over the past four quarters. This compares well to the number of 51.43% which is the 5 year average. Additionally, as we move further down the income statement, we see that management is making progress in its costs, with Hasbro’s 8.3% 12-month net profit margin comparing favorably to the 6.92% average. of the past five years.
Suffice it to say, maintaining a high gross margin and net profit margin during inflationary cycles is crucial because it helps Hasbro continue to generate strong cash flow.
Despite the aforementioned net income growth rate, Hasbro’s GAAP price-to-earnings ratio is 16.59; a ratio well below Hasbro’s 5-year average of 25.34. However, since forward earnings forecasts are subjective at best, one can instead focus on Hasbro’s assets as well as its sales to demonstrate how this stock remains undervalued. Hasbro’s forward sales and book multiples, for example, sit at 1.65 and 3.65, respectively. Both of these multiples are about 40% lower than Hasbro’s corresponding 5-year averages. Additionally, the significantly improved forward cash flow multiple of 13.5 demonstrates that cash flow from operations is expected to be very strong, which in turn should fuel the earnings cycle again.
The bears will point to Hasbro’s track record as a wildcard, but we wouldn’t agree here. Although long-term debt topped $3.7 billion in the company’s last reported quarter, the interest coverage ratio came in at 5.6 in the June quarter. Additionally, despite the large amount of goodwill and intangible assets on the balance sheet, Hasbro reported more than $3.6 billion in treasury stock on its balance sheet at the end of its most recent second quarter. Treasury shares are shares that have been redeemed but have not yet been withdrawn. Suffice it to say, if this figure were added to the equity number ($3.03 billion), ratios such as the debt-to-equity ratio, for example, would look much better on paper.
In summary, Hasbro’s profitability, valuation and balance sheet trends all point to limited downside risk here. Additionally, stocks are now running into long-term support and the 3.6%+ dividend yield remains strong after being paid for 32 straight years now. Let’s see what becomes of our iron condors. We look forward to continued coverage.