How Does Hasbro’s (NASDAQ:HAS) P/E Compare To Its Industry, After The Share Price Drop?

To the annoyance of some shareholders, Hasbro (NASDAQ:HAS) shares are down a considerable 34% in the last month. The recent drop has obliterated the annual return, with the share price now down 24% over that longer period.

Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. Perhaps the simplest way to get a read on investors’ expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

How Does Hasbro’s P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 16.28 that there is some investor optimism about Hasbro. The image below shows that Hasbro has a higher P/E than the average (15.1) P/E for companies in the leisure industry.

NasdaqGS:HAS Price Estimation Relative to Market, March 10th 2020

Hasbro’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper.

How Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.

In the last year, Hasbro grew EPS like Taylor Swift grew her fan base back in 2010; the 133% gain was both fast and well deserved. Regrettably, the longer term performance is poor, with EPS down -4.7% per year over 3 years.

Remember: P/E Ratios Don’t Consider The Balance Sheet

The ‘Price’ in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

How Does Hasbro’s Debt Impact Its P/E Ratio?

Hasbro has net cash of US$559m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.

The Bottom Line On Hasbro’s P/E Ratio

Hasbro trades on a P/E ratio of 16.3, which is above its market average of 15.1. Its net cash position is the cherry on top of its superb EPS growth. To us, this is the sort of company that we would expect to carry an above average price tag (relative to earnings). Given Hasbro’s P/E ratio has declined from 24.5 to 16.3 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. For those who don’t like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.

Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term.