We are upgrading our rating on JAKKS Pacific Inc. (JAKK), a premier manufacturer of toys and consumer products, to Outperform form Neutral. The rating was upgraded on a host of factors including better-than-expected earnings, increased guidance, seasonality of demand, strong product portfolio and expansion of international business.
Third Quarter Flashback
JAKKS Pacific reported adjusted third quarter 2010 earnings of $1.23 per share, beating the Zacks Consensus Estimate of $1.07 and higher than $1.13 in the prior-year quarter. The third quarter earnings included a tax benefit of $0.17 per share.
The company reported a 0.8% year-over-year decrease in revenues to $348.7 million. However, the reported revenues outperformed the Zacks Consensus Estimate of $306.0 million. While the company experienced a decline in net sales, the results were aided by cost cuts, restructuring activities and strong sales of traditional toys such as dolls and Halloween costumes.
Seasonal Demand
JAKKS Pacific is operating in its fourth quarter, which is seasonally the strongest owing to the holidays. We believe the multi-brand company remains well positioned to capitalize on the season given the increased demand for its new toys and electronics. ToysRUs, one of the largest customers of the company, recently listed JAKKS’ Disney Princess & Me 18-inch dolls as one of the Top 15 best new toys of the 2010 holiday season.
Increased Guidance
JAKKS also raised its fiscal 2010 adjusted earnings guidance range to $1.19–$1.25 per share from its prior guidance range of $1.10–$1.20. The company also increased its sales guidance to $710–$720 million from $660.0– $670.0 million based on strong bookings for the fourth quarter.
Including tax benefits of $10.8 million, or 31 cents per diluted share, and the Friedman benefit payment of $2.8 million, or 6 cents per diluted share, the company expects fiscal 2010 earnings to be in a range of $1.44 to $1.50.
Strong Product Portfolio
Many of the company’s product launches in 2010 and early 2011 look much better than products of 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 drive growth for JAKKS in the remainder of 2010.
2011 seems more lucrative in terms of property releases. A relaunch of Pokémon and three major movie properties are slated for release in 2011, including Pirates of the Caribbean: On Stranger Tides, Smurfs and Real Steel.
International Business
The company has been taking initiatives to strengthen its international business. One overseas property of JAKKS is presently drawing considerable attention in Monsuno. This is an animated Japanese television series, likely to be on air in fall 2011 or spring 2012.
Based on this television venture, the company developed a complete Monsuno toy line and plans to launch it next year. We believe Monsuno will play as a major catalyst in the 2011 earnings.
Share Repurchase Program
During the third quarter, the company also announced a share repurchase program of $30.0 million, which will also enhance is shareholders value, going forward.
Although JAKKS Pacific’s sales will be partially affected due to the loss of the WWE consumer license and lower demand for several product lines such as Hannah Montana and Pokemon, based on the above fundamentals, we expect the stock to fetch above-market returns and upgrade it from Neutral to Outperform.
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