Summary
- JAKK is not getting enough credit for the operational and balance sheet improvements it has made since CFO John Kimble joined the company.
- The company has plenty of opportunities to continue to grow through product innovation and distribution increases.
- JAKK trades at a valuation well below rivals MAT and HAS despite its superior performance.
JAKKS Pacific (JAKK) is not getting credit for the operational and balance sheet turnaround made under CFO John Kimble, making it one of the most undervalued stocks around. The stock has upside to $50 if it can merit the multiple of its struggling larger peers.
Company Profile
JAKK is a toy company that designs, produces, and distributes toys and related products. Among the types of toys it sells includes action figures, dolls, toy vehicles, foot-to-floor ride-on products, dress-up and Halloween costumes and accessories, kid's furniture, and outdoor toys.
The company make its own branded toys, licensed toys, and private label toys. Some of its key licenses include Nickelodeon, Disney ( DIS ), Pixar, Marvel, NBC Universal, Microsoft ( MSFT ), Sega, Sony (SONY), Netflix ( NFLX ), and WarnerMedia (WBD). Its license agreements have royalties ranging from 1% to 23% of net sales, and some have minimum royalty guarantees and up-front or advanced royalty payments.
JAKK sells its products via mass-market retail chains, department stores, office supply stores, drug and grocery stores, club stores, dollar stores, toy specialty stores , as well as e-commerce websites. Walmart ( WMT ) and Target (TGT) are its two largest customers, with both representing over 25% of its sales.
Opportunities
One area that has really helped JAKK is moving away from a reliance of licenses and focusing more toys that it designs. Rest assured, the company isn't completely moving away from licenses and they remain an important part of its business, but the company is no longer completely dependent on the next blockbuster movie or video game. This gives them more control over their destiny, and these toys generally provide better margins since there is no royalty fee attached.
Speaking on the topic its Q3 earnings call , CEO Stephen Berman said:
"I hope it can help illustrate some of the things which differentiates JAKKS from other companies in our space, certainly among the publicly traded ones. As we become more focused on evergreen segments of business built around timeless play patterns, that has diversified us away from signing a bunch of new toy licenses each year based on yet to be launched IP with the hope that one or two would break out.
"That change in direction has meant even more work for the internal teams as they really have to push the value proposition of what we offer to secure listings and get retailers to go with us given the wide range of options they have. That can make for a slow road to growth on a product line-by-product line basis. But the payoff is when it starts to work, and it could really take off from there."
Hand-in-hand with JAKK's improved product innovation is also the opportunity for increased distribution. On this front, the company has started to gain shelf space, including with TGT and WMT, who have both begun to give JAKK more shelf space as well as allowing it to get into more locations. Domestically, the company also has the opportunity to get into more retailers as its toy offerings become more popular. And while it sells through Amazon ( AMZN ), it's a less than 10% customer, so there seemingly should be more room to increase sales there.
JAKK is also expanding internationally and bringing back some of its international distributors. So far, this appears to be working as through Q3, the company saw a 65% increase in international sales to $88.7 million.
Several years ago, the company also began using a 3-tier product development program with the purpose of penetrating different types of accounts. This gets the company's toys not only into the mass market with its key customers, but also secondary accounts like drug stores, down to Five Below ( FIVE ) and dollar stores. As a result, this strategy has helped them gain shelf space across different retail categories as well.
Discussing distribution on its Q3 earnings call, Berman said:
"We've also been benefiting from some of our largest customers allocating to us increased retail shelf space in an increased number of doors. We're selling a broader product lineup into our customer base, and they are increasing the number of places consumers can find and engage with our ranges. It's that type of momentum that will help us sustain a portion of our recent growth heading into 2023 despite putting up such great results this year and last."
And while JAKK has focused on its own product innovation, it should also benefit from a strong 2023 movie slate for its licensed products. DIS will release a live action version of The Little Mermaid , as well as a new movie called Wish . There will also be a new Transformer movie coming out, and the company will support Hasbro's ( HAS ) Dungeons & Dragons movie release as well.
Risks
Toys sales aren't immune to a weakening consumer, so a more difficult economy is a risk. While retail earnings have been decent, companies such as TGT have struck a generally cautious tone. The retailer said it would be more guarded when making inventory commitment for many consumer discretionary categories .
UBS Executive Director Arpiné Kocharyan, meanwhile, recently told CNBC that in the toy industry, "anything below $30 is performing quite well. Anything above that is performing quite poorly."
HAS CEO Chris Cocks, meanwhile, thought that slowing consumer demand would continue into the first three quarters of 2023 .
Along those some lines, JAKK also has customer concentration with WMT and TGT. As mentioned above, TGT is looking to be more cautious committing to consumer discretionary inventory, which while not mentioned could include toys.
Valuation
JAKK trades under 3x the 2023 consensus EBITDA of $70.6 million and 2.5x the 2024 consensus of $79.0 million.
It trades at a forward PE of 5x the 2023 consensus of $3.81. Based on 2024 analyst estimates of $4.25, it trades at 4.5x.
JAKK is projected to see its revenue decline -6% in 2023 after a 23% increase in 2022.
Comparatively, fellow toymaker HAS trades at nearly 10x 2023 EBITDA of $1.15B and an over 12x forward PE. Mattel ( MAT ) trades at nearly 9x 2023 EBITDA of $956 million and an over 13.5x forward PE. Both are projected to generate minimal to no revenue growth in 2023, according to analyst estimates (from FinBox).
Earnings Preview
For Q4, JAKK is projected to generate revenue of $95 million and EPS of -$1.37. While Q3 tends to be its big revenue quarter, these numbers appear to be too low in my view.
Commentary from TGT on CNBC (as mentioned by an analyst on TGT's call), noted that toy sales were strong in Q4. Given that JAKK has been taking shelf space at TGT and WMT, leads me to believe the quarter will be solid.
Guidance is always key, and analyst expectations for 2023 currently look pretty conservative, as they are projecting a nearly -6% decline in revenue to $715.7 million. Given that JAKK has been taking shelf space, international expansion, a good 2023 movie slate, and the company offering limited edition Tsum Tsums figures for Disney 100 Years of Wonder , I think its 2023 forecast should be able to jump over the low analyst bar, even with consumer headwinds.
Conclusion
JAKK has been greatly outperforming its largest rivals. However, its stock trades at a major discount to both HAS and MAT. The most likely reason for this is that the company has had many struggles in the past and generally been inconsistent.
All that has changed, however, since JAKK brought on industry vet John Kimble as CFO in November 2019. He's done a really great job of helping the company improve its operations, transition its focus to in-house product development, and fixing JAKK's over-leveraged balance sheet.
Company Presentation Company Presentation
Today, the stock is not getting credit for the structural changes it has undergone under Kimble. While the stock has done well, it remains undervalued. Put a 6x multiple on the $79 million 2024 EBITDA consensus and JAKK is a $50 stock.
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JAKKS Pacific Is Still Not Getting Credit For Its Turnaround