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Even if Hasbro's toy sales go to ZERO during the coronavirus pandemic, it's still strongly positioned: UBS

Brian Sozzi
Editor-at-Large

Wall Street equity research tends to get wacky during recessions or periods of great stress in the markets.

Case in point is a new research note Monday by UBS on toy king Hasbro (HAS).

UBS analyst Arpine Kocharyan voices some concern over toy demand this month at independent retailers likely dealing with shutdowns. Demand is strong at major retailers such as Walmart and Target, as consumers pick up board games for family night in or educational games for children home from school. This is a dynamic Hasbro Chairman and CEO Brian Goldner told us about just last week.

“What we are seeing is clearly people are all together, they’re spending time together and our games business is quite robust. Clearly, people know our games brands such as Monopoly, Game of Life and Operation,” Goldner said on The First Trade.

“Play-doh products as kids are looking for creativity and parents are looking to educate their kids and develop milestones, clearly another area of growth for us,” continued Goldner.

Manassas, UNITED STATES: This 24 May, 2006 image shows a bottle of "Play-Doh" cologne (R), a fragrance released by Pawtucket, Rhode Island.-based toymaker Hasbro and the Demeter Fragrance Libray, the cologne?s New York manufacturer and distributor, as part of a year-long celebration of the beloved modeling compound's 50th birthday. "Play-Doh" compound's distinctive aroma will be available in a limited-edition 1-ounce spray bottle priced at 19 USD and a four-ounce (113 gram) bottle for 39.50 USD. A can of Play-Doh costs about 50 cents USD. Signatures of the Play-Doh brand is its scent,? Play-Doh is one of those scents that seems to evoke a very strong emotional response in everyone, because we all remember those good times as kids playing with Play-Doh," said Mark Crames, CEO of Demeter Fragrance Library. AFP PHOTO/Karen BLEIER (Photo credit should read KAREN BLEIER/AFP via Getty Images)

But to squash any concern on Hasbro’s fundamentals — which Kocharyan rates a Buy with a $117 price target — the analyst serves up a worst-case scenario analysis.

We would liken it to a doomsday forecast meant to push back at investors worried about a Buy rating on a toymaker stock as consumer spending falls off a cliff.

Writes Kocharayan:

“In a theoretical zero rev scenario, we estimate Hasbro could cut more than 75% of COGS (cost of goods sold), more than 40% of SD&A (selling, depreciation and amortization expenses) and most of ad spend, and defer 50% of capex. Hasbro will still have to pay minimum guarantees under third party licensing agreements of $110 million for '20. Combined with ~$210 million of interest expense, Hasbro would need to fund around $1.4-$1.5 billion of expenses. Even if Hasbro were to not cut the $385 million of annual dividends, we estimate cash on hand of around $1 billion, plus revolver capacity of ~$2 billion (including accordion feature of ~$400-500 million) could allow Hasbro ample liquidity to navigate more than 12 months of disruption. Hasbro does not have sizable maturities in 2020.”

Being a former stock analyst that picked stocks during the Great Recession, I can tell you more doomsday forecasts by sell-side analysts lay ahead for any stock under coverage rated a Buy. Get used to shocking notes such as this circulating Wall Street trading desks. This is the new short-term normal for equity research analysts — prove to nervous investors a Buy rating is justified in this riskier coronavirus world given cash piles, cash access and fundamentals.

A job well done here by UBS. Now if only the stock call works out, too.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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