4 Reasons Why Hasbro Was Downgraded By BMO

Hasbro, Inc. HAS shares are overvalued trading at an 18.1-19.3 multiple on 2019 estimated earnings, and a more appropriate valuation is 15 times next year's earnings, according to BMO Capital Markets. 

The Analyst

Analyst Gerrick Johnson downgraded Hasbro from Market Perform to Underperform with a price target lowered from $80 to $75.

The Thesis

Hasbro's stock multiple has gotten ahead of itself, as the historical average for large-cap toy stocks is closer to 15 times next year's earnings, Johnson said in the Monday downgrade note. (See the analyst's track record here.) 

Johnson named four drivers behind BMO's downgrade: 

• Toy demand is "good," but demand for large discretionary items is "better." Investors may find better opportunities among discretionary leisure companies, whose stocks trade at a median of 12 times earnings and should expand in a strong economy.
• Consumers likely took full advantage of Toys R Us' liquidation sales by "pantry loading." This could impact Hasbro's performance in the back half of 2018.
• Toy companies like Hasbro are tied to movies and are underperforming, as evidenced by management's own commentary sales of products related to "Star Wars," which fell notably short of expectations. Looking forward, Hasbro is more exposed to movies than any other toy company, with 10 tie-ins in 2018 — up from seven in 2017,
• Hasbro's key franchise brands, such as My Little Pony and Nerf, are experiencing consumer fatigue, Johnson said. This adds pressure on the company to either innovate with new brands or "re-activate" older brands, the analyst said. 

Price Action

Hasbro shares were down 2.58 percent at the time of publication Monday at $94.03. 

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