We recently downgraded our long-term rating on a California-based multi-brand company JAKKS Pacific Inc. (JAKK), from Outperform to Neutral based on the seasonality of demand and increasing input costs. The company is engaged in designing and marketing a broad range of toys and consumer products.

The company’s third quarter 2010 results came in well ahead of the Zacks Consensus Estimate. Besides, the company has ample cash balance.  We remain optimistic about the company’s long-term growth potential with new product launches.

Many of the company’s product launches in early 2011 look much better than products of the previous years. Management remains optimistic on the Disney Princess and Fairy product lines, and sees substantial momentum for Phineas and Ferb, Club Penguin and Toy Story products, which will likely be the future growth drivers.

The company has been taking initiatives to strengthen its international business. One overseas property of JAKKS is presently drawing considerable attention in Monsuno. We believe Monsuno will act as a major catalyst in the 2011 earnings.

However, the company’s business is highly seasonal. JAKKS Pacific is leaving its fourth quarter, which is seasonally the strongest owing to the holidays. The company generates around 30% of its revenue during this period. After the fourth quarter, the earnings growth will likely decelerate.

Underperformance in key brands like Hannah Montana and Pokemon and loss of WWE consumer license, which moved to Mattel Inc. (MAT) as of January 1, 2010, will continue to be a haul on the company’s sales growth and will lead to tough year-over-year comparison.

Additionally, faltering consumer confidence, uncertainty regarding labor issues in Asia and possible container shortages causing shipping delays restrain the company’s growth as well.

Wall Street analysts also did not budge their estimates over the last 7 as well as 30 days period. Though year-over-year estimate for earnings growth per share is anticipated to accelerate 17.6% in the fourth quarter, it is expected to decline 48.9% in the first quarter of 2011.

Based on the above fundamentals, we downgrade our rating from Outperform to Neutral. While JAKKS has various positive attributes, in our opinion, much of the positive news in the stock has been reflected at the current level and there is no room for much upside.

JAKKS Pacific currently retains its Zacks #3 Rank, which translates into a short-term Hold rating. Major competitors of the company are Hasbro Inc. (HAS) and LeapFrog Enterprises Inc. (LF).

 
HASBRO INC (HAS): Free Stock Analysis Report
 
JAKKS PACIFIC (JAKK): Free Stock Analysis Report
 
LEAPFROG ENTRPS (LF): Free Stock Analysis Report
 
MATTEL INC (MAT): Free Stock Analysis Report
 
Zacks Investment Research