Tariffs Are Toying With Hasbro Shares - And For Good Reason

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We're talking about an 8.9% drop in Hasbro (HAS) - Get Report shares since July 31, the day before Trump wielded his 10% or 25% added tariffs threat on China. 

That drop makes sense, Goldman Sachs analysts implied, as 2020 EPS could fall by roughly 8.9% should the tariffs happen. 

Here's how it all breaks down. 

If Hasbro Absorbs Tariff

If it's a 10% tariff and Hasbro absorbs 100% of the added cost, the company would see $71 million in added operating costs, according to the Goldman analysts. That's not nothing considering Hasbro is expected to see $1 billion in EBITDA for 2020, according to data from FactSet. Most analysts estimate Hasbro sources roughly two-thirds of its product from China.

A part of that $71 million number is more than just the tariffs, themselves. The tariffs would mean almost zero port of origin sales, or those that occur directly from China. That means Hasbro would make more sales in the U.S., incurring a higher volume of tariffs. 

The earnings per share impact would be roughly 8.9%, as 2020 EPS would drop from roughly $4.71 to $4.26. 

But Hasbro has the ability to mitigate the tariffs, avoiding absorbing 100% of the added costs. 

Tariff Mitigating Efforts

The drop in EPS wouldn't be as high as 8% if Hasbro can raise prices. 

Why is that true? Because Hasbro can get away with higher prices, Goldman thinks. "Hasbro's gross margins (ex. royalties) of 52.1% (2018) have tended to be higher and more stable than Mattel's (MAT) - Get Report , which in our view suggests that Hasbro has relatively stronger pricing power," Goldman analysts wrote in a note. 

Analysts at D.A. Davidson & Co. also said Hasbro had notified retailers of its plan to hike prices, but ultimately held off on that plan in light of tariff uncertainty. 

Aside from pricing, Hasbro could move production out of China. "HAS has been diversifying its manufacturing footprint for several years, and recently increased investment in this area to accelerate its plans," the Davidson analysts wrote in a note, although they didn't specify exactly which country Hasbro is targeting. 

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