Why the Market Toyed With Hasbro After a Solid Earnings Beat

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In this segment from Market Foolery, host Chris Hill and Million Dollar Portfolio's Jason Moser to explain why an outperforming quarter for Hasbro (NASDAQ: HAS) led to a sell-off in the stock after the second-quarter numbers were revealed. It's not the usual buy-on-the-rumor, sell-on-the-news answer, either: The key points, he says, are issues entirely out of the company's hands. But Chris sees more causes for optimism.

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A full transcript follows the video.

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This video was recorded on July 24, 2017.

Chris Hill: Hasbro's second-quarter profit and revenue came in higher than expected. For some reason, the stock is down nearly 10% this morning.

Jason Moser: Well, I'm going to depend on you to tell me exactly why. Oh, that's why I'm here.

Hill: [laughs] That's why you're here.

Moser: There are sell-offs where you have to ask yourself, uh-oh, what's wrong with this business, and what's the next shoe to drop? This is not one of those cases. When you look at it on the whole, with a big-picture perspective, this was a good quarter. There are a lot of reasons to be encouraged. The business continues to grow revenue at double-digit rates. You look at some of the dynamics -- the stock has been on a massive tear all of 2017. It's really been the beneficiary of not only a good business model and good collection of brands and good leadership, but they've also benefited a little bit from Mattel's shortcomings. The stock had a nice run up to this point.

I think probably the biggest concern, going through the call, is this performance on the international front. Particularly, they're calling out the U.K. and Brazil. Those are important markets. When you look at the international segment for Hasbro, it's close to half of revenue. Now, it doesn't contribute as much on the profitability side, but it's still important. And Brazil is certainly the most important market in the Latin American region. The U.K. is obviously an important one in the European market as well. So there are some concerns there due to macroeconomic challenges that are beyond, really, anybody's control.

So what that led to on the operating profit side, operating profit fell somewhere in the neighborhood of 40% or something for the quarter -- 43%, I think, actually. And it sounds like management is guiding for some headwinds there for the remainder of the year on the international side, given the performance in those two countries. But I wouldn't read too much into that, because to me, there are far more catalysts on the horizon than concerns with these guys. I mean, Star Wars: The Last Jedi stuff is going to hit shelves on Sept. 1, which is Force Friday II or something.

Hill: Do you think they're going to sell anything then?

Moser: That remains to be seen. I think Star Wars is starting to gain a little traction, maybe with the millennial generation. There's more Frozen stuff coming out toward the holiday season; they're guiding to a lot of reasons to be optimistic for this holiday season. We talk about these businesses, Hasbro in particular, their success really comes from making sure that they hitched their wagon to the valuable IP stars out there, like Disney. And Hasbro has done a wonderful job of that. They continue to reward shareholders with a growing dividend. It's at 50% from 2012 from $1.44 per share to $2.16 per share over the trailing 12 months.

There are a lot of reasons why I think investors in Hasbro should be happy with the way the business is performing. I think that today probably represents a good look, maybe, if you want to buy shares or add shares. This is a good business with a lot going for it. I think there are far more catalysts on the horizon than concerns, today's sell-off notwithstanding.

Hill: I was pleasantly surprised to see that part of what fueled this quarter for them was some really strong sales in the Nerf category and Transformers. I thought, that's nice, that the toy sales aren't being affected by the terrible Transformers movies.

Moser: Or Shia LaBeouf's most recent complete blow-up. I mean, we could have a whole podcast on that alone. But it's nice to see, at least, Hasbro is not levered to Shia LaBeouf as Chipotle is to getting sick.

Chris Hill owns shares of Chipotle Mexican Grill and Walt Disney. Jason Moser owns shares of Chipotle Mexican Grill, Hasbro, and Walt Disney. The Motley Fool owns shares of and recommends Chipotle Mexican Grill, Hasbro, and Walt Disney. The Motley Fool has a disclosure policy.