Tuesday, Mar 29th 2022
We’ve initiated an investment in Hasbro (HAS), the iconic toy, game and entertainment conglomerate with upside optionality for clients in our Opportunities portfolio. Also, as a part of our broader risk-on gameplan, we’ve also increased our position in Moody’s Corporation (MCO).
A trip down memory lane
Hasbro (HAS) has been selling toys, games, and entertainment since the 1960s, amassing an unparalleled portfolio of ~1,500 brands full of household names. Monopoly, Play Doh, Battleship, and Twister are just a few of childhood favorites owned by Hasbro, with these franchises proving to have lasting influence over the years.
In evaluating the investment opportunity in Hasbro, however, it wasn’t this legacy portfolio of toys that got us excited, but the opportunity we believe exists in the company’s role-playing and entertainment businesses.
Hasbro reports results across three major segments — consumer products, entertainment, and Wizards of the Coast. The first bucket includes most of the household toy and game brands mentioned above while the entertainment segment includes franchises like Peppa Pig.
Coast to coast
Wizards of the Coast (WOTC), a builder of role playing, trading card, and digital games was acquired by Hasbro in 1999. In our view, this is the sleeping giant within Hasbro’s business, and the segment that offers the greatest upside potential.
Clients may be familiar with Dungeons and Dragons or Magic: The Gathering as games played by mathletes in high school; but many players have remained loyal to D&D, spending consistently on paper and online trading cards. With its maniacal fan base, strong network effects from MTG and D&D, and upcoming content releases, we believe there is a long runway for growth in this segment that is underappreciated by other investors.
There has been a push from hedge fund Alta Fox to spin out Wizards of the Coast into a standalone business, which they believe could be a huge unlock of value for shareholders, pushing the stock to $200/share up from ~$84/share. Although it remains to be seen if this spin-off will occur, we don't need a spin-off for this investment to be successful.
Dungeons and Dragons (D&D) and Magic: The Gathering (MTG) have grown revenues ~70% on a 2-year basis and ended 2021 with EBITDA margins of 47%. If WOTC continues to outperform, we believe there is a high likelihood investors could assign a higher value to this segment and, in turn, Hasbro’s business overall.
Not toying around
Turning back to Hasbro’s toys business, this segment has consistently grown sales faster than the industry over the last decade, with the only exception coming in 2018 when Toys “R” Us filed for bankruptcy and liquidated its holdings.
Toys remain a strategic category for many retailers, driving traffic and engagement, both in-stores and online. Even during slowing economic periods, Hasbro’s toys business has proven to be resilient, and we believe this portion of the business should provide some stability amid the uncertainties of the current economic environment.
Lastly, we remain cautiously optimistic on Hasbro's entertainment business.
We view the segment as a great call option given the lack of investor enthusiasm around current prospects for this segment. Brands like Peppa Pig are well established, but the recent success of TV series like Yellowjackets and The Rookie suggest a robust development pipeline. We believe this segment has the potential to make Hasbro both a content arms dealer amid the growth of the streaming business, while also offering the business upside via merchandise and related franchise growth through the gaming and consumer segments.
Overall, we’re excited to start a position in a business trading at a historically cheap valuation that offers upside potential and economically-resilient growth.
Slowly but surely
As noted in a recent trade update, we’re excited to continue to deploy our cash reserve that we’ve been building for months. We continued this trend by increasing our position in highly free-cash-flow generative Moody’s Corporation (MCO). Moody’s is a dominant leader in a duopolistic industry with strong pricing power, and should continue to provide stability in the Opportunities strategy amidst a volatile environment.
We plan to continue to deploy our cash reserves across all three portfolios into high-quality businesses that we believe are “on sale” over a long-term time horizon.
As we’ve said for weeks, we have a gameplan and we’re ready to execute on it.
Let us know if you have any questions about these moves and a member of our investor relations team will follow up.
Onwards, Titan Investment Team
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