PSB Monthly Issue May 2015

Don’t Toy Around, Invest In This Company

One of the side effects of having small children is how you suddenly become experts on the toy market.  You know what toys and games are hot, and what all the kids want.

Between birthday parties, store visits, and commercials, it’s easy to see what the latest “it” items are.

Toys and games are a massive industry as well.  The market is easily over $20 billion spent per year in the US alone.

Face it, we spend a lot of money on our kids!

An interesting aspect about toys is what changes in the market from year to year and what doesn’t (in terms of popularity).

There are those evergreen toys, which sell very well year after year.  Legos are a good example.  Big Wheels are another item that doesn’t seem to go out of style.

And then, there are the toys which become insanely popular for a relatively short-period of time.

These are the items which often get a boost from a new show or movie.  The best examples in recent years are all the toys based on Disney’s Frozen.

Of course, Frozen has become a massive hit – one of the biggest ever for Disney.  And, with the ultra-popularity of the move, came a huge amount of sales of Frozen branded toys.

Now eventually, when Disney releases another huge hit, Frozen toys probably won’t sell as well.  But in the meantime, it’s been well over a year since the movie was released and toy sales are still going strong.

One toy company offering a solid mix of evergreen and branded products is JAKKS Pacific (NASD: JAKK).

The Toy & Games Business

JAKKS develops consumer products, mostly toys and games, in the US and internationally.  The company offers action figures, accessories, toy vehicles, electronics products, dolls, infant toys, outdoor toys, seasonal toys, video games, and more.

There are several things to like about JAKKS and its products.

First off, the company has a highly diversified portfolio of toys and games thanks to an active track record of acquisitions.  JAKKS has actually made 19 acquisitions since its inception.

Here’s the thing…

The company’s products are all over stores thanks to a successful strategy of licensing highly recognizable names, the acquisitions I just mentioned, and strong internal growth of proprietary brands.

Some of the brands JAKKS creates toys for are Star Wars, Marvel, Disney, Nickelodeon, Black & Decker, Barbie, and many others.  It seems JAKKS has produced products under just about every major license.

The company is active in popular products such as Frozen and Avengers.  Plus, JAKKS has a solid track record of evergreen products such as Big Wheels, ride-ons, and indoor/outdoor furniture.

What I really am enthusiastic about is the company’s prospects as the summer approaches.

You see, the company has new licenses covering some of the biggest blockbusters about to come out.  This includes Avengers, Batman versus Superman, Minions, and others.  You can pretty much guarantee those films are going to be huge… and of course, they’ll sell lots and lots of toys.

The Numbers 

As good as JAKKS seem from a qualitative perspective, it’s an even more attractive investment looking at the numbers.  The company is strong across the board.

Quarterly revenues climbed 38% last quarter to $114 million.  That includes a 2.5% increase in gross margins.  The sales increase was driven by a robust 82% increase in traditional toys and electronics as well as international sales.  Meanwhile, adjusted EBITDA climbed from a loss of $11.6 million to just a $0.9 loss over the same period.

The company is clearly on a path to profitability.

What’s more, JAKKS has $105 million in cash compared to $215 million in debt.  Current assets are also 3.1x current liabilities.  Basically, the company has plenty of cash to cover debt servicing as well as make potential acquisitions.

Investment Risks 

As with any small cap investment, JAKK does have a few risks. 

A slowdown in the overall economy could lessen the demand for toys and games, which tend to sell better when the economy is growing.

Additional competition in the space could make it harder for the company to grow revenues.

Finally, some brands may not perform as well as expected and make it more difficult to sell toys associated with them.

Potential Return of 100% or More

JAKK has a strong history of growth and success.  The company does an excellent job of mixing evergreen products with popular brand licenses.  Plus, JAKKS has excellent overall financial numbers.

Yet, the shares are trading at just 7.5x earnings and 8.4x projected earnings.

That’s a heavily discounted value for a company on the verge of profitability.  Not to mention, the stock is trading at a miniscule 0.2x sales.  There should be plenty of room for growth.

Based on our analysis, we see JAKK climbing to $14.00 a share or more.  Buy the shares now for potential gains of 100% or more!

KEY INVESTMENT DATA

Name:                                          JAKKS Pacific Ticker Symbol:                                           JAKK Market Cap:                                    $135 million Recent Price:                                             $6.91 PSB Rating System      4.8 Stars  Raging Revenue:  (4.9 stars) The company has 38% year over year growth on quarterly revenues.  The gains came from both traditional toys and international sales. Beautiful Books: (4.7 stars) JAKK has over $105 million in cash compared to $215 million in debt.  The company has a strong current ratio of 3.1x. Stellar Structure: (4.9 stars) The company’s insider ownership is at 39%.  In addition, institutions own another 88%.  Overall, it’s clear the smart money likes what JAKK has to offer an investment. Valuation Verification: (4.6 stars) JAKK is trading at just 7.5x earnings revenues, easily under half the industry average.  Given the valuation, the shares could climb 100% or more. Meaningful Milestones: (4.8 stars) JAKK has several brand licenses tied to summer blockbuster movies including Avengers, Batman versus Superman, and Minions.  This should provide a big jolt to revenues as associated toys are projected to be big sellers.

Action Recommendation

BUY JAKKS Pacific (NASD: JAKK) up to $7.50 per share. 

Recent price is $6.91 

Use a stop-loss of $5.00 on this position. 

Don’t forget your position sizing and stop-loss rules. 

 

Position Updates

Here are some highlights from the past couple weeks…

• USA Technologies (USAT), Marchex (MCHX), Demand Media (DMD), Glu Mobile (GLUU), Gain Capital (GCAP), and NetSol Technologies (NTWK) all reached new highs since our last update.
• USA Technologies (USAT), Glu Mobile (GLUU), and NetSol Technologies (NTWK) have all reached gains of 90% or more.

Category: PSB Monthly Issues