2023-08-09 05:44:17 ET
Summary
- JAKKS Pacific manufactures licensed toy products tied to movie openings, such as Super Mario Bros. and Disney's Little Mermaid.
- Management has made strong financial decisions since the pandemic, resulting in a safer, nearly debt-free balance sheet and steady profitability.
- JAKKS Pacific's valuation is attractive compared to toy-industry peers, with very low multiples on earnings, EBITDA, and sales.
- I have target prices of $30 in 12 months and $40 in 18 months.
JAKKS Pacific ( JAKK ) is a toy maker focused on releasing dolls and play items for children tied to movie openings around the world. Super Mario Bros. and Disney princess-related marketing campaigns with action figures, collectibles, games, and costumes are examples of the licensed products JAKKS manufactures for sale in 2023.
The company has been around for many years, but management has done an impressive job of running the business since the pandemic began, with smarter financial management than before, moving to a nearly debt-free balance sheet in 2023 ($33 million in cash vs. roughly $40 million in debt and lease obligations) generating high/steady operating income.
I mentioned the stock as a buy around $17 in my Volume Breakout Report series of articles last summer. It has generally traded in an uptrend since then, with price now at $21 per share.
The good news is JAKKS valuation has improved, if anything, over the past 12 months. And, the operating outlook is just as bright. Buying this small toy company ($200 million market cap) at 5x EPS, 3x EBITDA, and less than 2x tangible book value could be a worthwhile decision a year or two down the road.
A+ Valuation
Seeking Alpha gives the JAKKS valuation story an "A+" rating based on price (or enterprise value) to underlying fundamental performance of the business. When comparative analysis is reviewed against other toy manufactures and the entire leisure industry, JAKKS is clearly the cheapest of the bunch. Below is a summary of the SA grade listed under a premium subscription today.
In my opinion, the smartest way to look at the JAKKS valuation is to include the large paydown of debt in enterprise value calculations. EV ratios on basic cash-generation EBITDA (3x) and overall revenues (0.25x) are honestly hovering around 10-year lows, whether you review trailing numbers or forward estimates by Wall Street analysts covering the company.
Measured against the closest toy peers of Mattel ( MAT ) and Hasbro ( HAS ) in particular, the valuation setup is incredibly inexpensive, especially when looking ahead 6-12 months. The EV to EBITDA estimate of 2.6x is an astonishing 75%+ discount to the two toy-brand leaders.
On EV to forward sales, the discount (disconnect) averages closer to 85% vs. Mattel and Hasbro!
You would assume, based on the ultra-low valuation stats, JAKKS is a very low-margin business with unmanageable debts. That's usually why a company is so drastically underpriced vs. industry averages. But not in this case. Profit margins from JAKKS are higher, while cash flow vs. debt and as a ratio of sales are superior.
Technical Trading Picture
JAKKS Pacific has been included in a variety of daily sort results looking for accumulation patterns since July of last year, both high-volume buying and low-volume reversal creations of mine.
On the 24-month chart below, I have drawn 200-day and 500-day (2-years effectively) moving averages. With price above $20, the share quote is presently trading above both of these trend creations. If we do get a large bear market selloff into late autumn on Wall Street generally (which is better than 50/50 for odds in my research), I am thinking decent long-term support and buying should keep price around/above the 2-year moving average near $16-17 today. You will notice this MA has provided significant support in the past.
You can also review how the stock has "outperformed" the Russell 2000 small-cap index (using the proxy IWM ETF) by a solid +56% over the latest 24 months.
On Balance Volume readings have been quite bullish since January 2022. The OBV line highlights healthy heavy-volume buying episodes, with low-volume retracement selling over the whole period.
In addition, the 14-day Money Flow Index is sitting in a normalized range currently, not oversold or overbought. Without much news flow from the company, now may be a good time to start buying shares (or add to your position) when the summer doldrums are peaking.
Final Thoughts
The company has a super-strong track record of beating analyst estimates since late 2020. According to Seeking Alpha data , JAKKS has bested quarterly estimates 11 of 12 times since September 2020, usually by a wide margin. To me, it's quite fascinating more investors have not discovered this toy investment, and bid shares dramatically higher.
You can make a logical argument that $30 or even $40 a share quotes are entirely reasonable, just to pull the valuation closer to Mattel and Hasbro ratios on underlying operations. Such would outline +50% to +100% total returns for investors today around $20. And, future growth in the business is likely, which should support even higher "fair value" figures in 12-18 months.
What's the risk owning JAKKS Pacific? Most of their toys are produced in China and Asia, just like Mattel and Hasbro. So, supply chain problems (both shipping and cost related) from this region of the world bear careful consideration and attention.
Management could overpay for future movie rights, crowding out profitability (margins) or getting stuck with inventory if a movie bombs or fails to ignite the projected interest of children.
Lastly, I worry about JAKKS getting too aggressive with rising cash holdings, where management decides to spend it on a dilutive acquisition spree of bolt-on toy production assets.
My concluding view is the undervaluation story is too great to ignore, while management of late has done a masterful job of running the business. If future decisions on which toys to bring to market are likewise successful, and a major share buyback is funded with new cash coming in the door, the stock price should easily beat the U.S. equity market for performance over the next couple of years. I rate shares a Buy and am looking to enter a position.
Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.
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Forget Barbie, Focus On This Toy-Maker Bargain: JAKKS Pacific