We recently upgraded our rating on Malibu, California-based JAKKS Pacific Inc. (JAKK), from Underperform to Neutral. The rating was upgraded on a host of factors including better-than-expected first quarter results, continued margin expansion, strong product line-up and healthy financials.
JAKKS Pacific reported first quarter 2011 loss of 39 cents per share, a penny ahead of the Zacks Consensus Estimate. The result compared unfavorably with 37 cents loss per share in the prior-year quarter. The company reported a 6.5% year-over-year decrease in revenues to $72.3 million. The quarter’s revenue, however, surpassed the Zacks Consensus Estimate of $67.0 million.
The company remains committed to the execution of its restructuring plan and cost saving initiatives, which are expected to improve profitability for 2011 and beyond. Gross margin in the first quarter expanded 100 bps to 33.6%, despite persistent cost pressure and a shift in product mix. Management expects to achieve margin expansion for the full year, as a result of its efficient supply chain management.
Many of the company’s product launches in 2011 look much better than its products of previous years. Management remains optimistic about the Disney Princess and Fairy product lines, and sees substantial momentum for Phineas and Ferb, Club Penguin, and Toy Story products. We expect booming Halloween business owing to an expanded product line. 2011 seems more lucrative in terms of property release. The relaunch of Pokémon and three major movie properties are slated in 2011, including Pirates of the Caribbean: On Stranger Tides (May 2011), Smurfs (July 2011) and Real Steel (October 2011).
JAKKS Pacific has been taking initiatives to strengthen its international business. Ventures in the UK, Spain and France are gaining momentum. One overseas property of JAKKS, presently drawing considerable attention, is Monsuno. This is an animated Japanese television series, likely to be on air in spring 2012.
From a financial standpoint, the company remains in excellent health. We believe that an abundance of cash on its balance sheet ($274.5 million in first quarter of 2011, 47.8% of total assets) will enable the company to successfully execute further acquisitions, in which management has a proven track record. Additionally, management expects to use this cash to pay down additional debt and repurchase shares.
On the downside, JAKKS Pacific’s business is highly seasonal with most of the revenue coming from the third quarter and particularly the fourth, which is the holiday season. Additionally, management remained concerned about a host of factors that will likely affect production and shipment throughout 2011, including labor issues, increased pricing pressures, transportation costs and increased costs for many manufacturers doing business in Asia. Moreover, the company expects cost inflation to continue in 2011. These are the factors that hold us back from being too optimistic on the stock at the current level.
Estimate Revision Trend
During the last 30 days, 1 analyst out of 8 increased the estimate while 3 analysts walked in the opposite direction. On the other hand, three out of seven analysts upped their estimates while one cut the same.
During the last 30 days, estimate fell 2 cents to 15 cents for the first quarter while for full fiscal 2011, the estimate upped by a penny to $1.41.
The company’s competitors include Hasbro Inc. (HAS) and Mattel Inc. (MAT). JAKKS Pacific currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.
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JAKKS PACIFIC (JAKK): Free Stock Analysis Report
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