JAKKS Pacific Sell-Off Looks Overdone (NASDAQ:JAKK)

Final March, I took JAKKS Pacific (NASDAQ:JAKK) to “Sturdy Purchase” saying that its long-term story was intact and that the inventory had been thrown into the deep low cost discount bin. The inventory is up over 85% since then. Extra just lately in December, I wrote that buyers proceed to not give the corporate credit score for the turnaround that CFO John Kimble has helped orchestrate and that the inventory is undervalued. With the inventory taking a giant haircut following its This autumn outcomes, let’s take a better on the title.

Firm Profile

As a reminder, JAKK is a toy firm. It designs and produces branded, personal label toys, and licensed toys from manufacturers similar to Disney (DIS) and Nickelodeon. Walmart (WMT) and Goal (TGT) are JAKK’s two largest clients, with every representing greater than 25% of its gross sales.

This autumn Earnings

For This autumn reported on the finish of February, JAKK noticed its income decline -3.4% to $127.4 million. That handily simply missed analyst estimates calling for gross sales of $128.7 million.

By class, Dolls, Position-Play/Costume Up was up 6.3% to $73.3 million, whereas Out of doors/Seasonal Toys noticed income rose 4.0% to $10.3 million. Motion Play & Collectibles fell -9.2% to $35.3 million, whereas Costumes plunged -39.7% to $8.5 million.

North American income dropped -4.5% to $101.9 million whereas Worldwide gross sales edged up 0.8% to $26.4 million. Latin America was as soon as once more a standout, seeing gross sales soar over 68.8% to $4.4 million, whereas Asia was additionally sturdy, with gross sales up 26.0% to $2.1 million. Europe was weak, as gross sales fell -7.5% to $18.0 million, whereas Australia & New Zealand gross sales sank -18.4% to $1.5 million.

Gross margins jumped 480 foundation level to 26.5%. Sequentially, gross margins had been down -800 foundation factors.

G&A bills, in the meantime, had been 12% larger to $34.4 million.

Adjusted EPS got here in at -$1.04, up from -$1.42 a 12 months in the past. Analysts had been anticipating adjusted EPS of -$1.14.

Adjusted EBITDA improved to -$10.9 million from -$12.1 million a 12 months in the past.

Stock was down -35% 12 months over 12 months to $52.6 million. Stock turnover fell to 52 days gross sales of stock from 72 DSI a 12 months in the past.

The corporate ended the quarter with $72.4 million in money and 0 debt.

As is widespread follow, JAKK didn’t provide formal steering.

Discussing the present atmosphere of its This autumn earnings name, CEO Stephen Berman mentioned:

“For the fifth consecutive Q1, we discover ourselves questioning concerning the outlook for the financial system and extra particularly the implications for the common shopper. A brand new overlay this 12 months is a little bit of a brand new movie and TV desert ensuing from the varied leisure business work stoppages of 2023, together with streaming suppliers taking a extra thrifty view of their funding ranges. Though that backdrop doesn’t make doing stable enterprise simpler for anybody this 12 months, we do really feel we’re higher arrange for achievement greater than most. Our deal with tried and true evergreen play patterns, manufacturers and class serves us properly in instances like these. These are the companies that always float to the highest of the market’s precedence record when there’s nothing being crowded out by among the massive one-off promotional occasions or actions. … With that view, we’re as soon as once more arrange for a stable 12 months. That’s to not recommend that we’re resistant to the bigger dynamics. Over the previous two springs, we now have significantly benefited from excessive product traces pushed by blockbuster April movie releases, driving gross sales tied to the film, in addition to supporting and increasing our year-round enterprise for these manufacturers. These are tough numbers to switch and a enterprise like our costume enterprise is commonly led by the most recent blockbuster movies. And the comparatively gentle quantity this 12 months tends to result in a considerably softer general enterprise.”

JAKK’s This autumn is way smaller than its Q3 quarter, when it ships its toys forward of the vacation season, so the general quarter itself was high-quality. Gross sales had been down barely, nevertheless it noticed a pleasant year-over-year enhance in gross margins. In the meantime, the corporate continues to do a pleasant job on the stock entrance.

What buyers didn’t like was the corporate speaking about 2024 being a bit more durable as a consequence of a weaker film slate. In 2023, the corporate properly benefited from the Tremendous Mario Brothers film, whereas the 12 months earlier than it was Encanto. On the identical time, I believe the corporate might be underselling the 2024 film slate, which incorporates potential with the likes of Minions 4, Moana 2, a brand new Ghostbusters film, Kung Fu Panda 4, and Sonic the Hedgehog 3, all of which the corporate has licenses with. Moana was a giant hit for the corporate, so I’m undecided why the second film can be completely different. Sure, Moana and Sonic are later within the 12 months, however they may nonetheless be large vacation sellers.

Valuation

JAKK trades 3.4x the 2024 consensus EBITDA of $63.7 million and a pair of.4x the 2025 consensus of $89.9 million.

It trades at a ahead PE of 6.5x the 2024 consensus of $3.96. Primarily based on 2025 analyst estimates of $4.68, it trades at 5.5x.

JAKK is projected to see its income decline -6% in 2023. Income is projected to develop 11.7% in 2025.

Comparatively, fellow toy maker Hasbro (HAS) trades at 9.5x 2025 EBITDA consensus of $1.05B and an almost 12x PE based mostly on 2025 estimates. Mattel (MAT) trades at 7.7x 2025 EBITDA estimates of $1.07 billion and a PE of practically 13x based mostly on 2025 estimates.

I proceed to see no cause that JAKK ought to commerce at such an enormous low cost to HAS and MAT given the turnaround on the firm.

At a 5-7x EV/EBITDA based mostly on 2025 estimates a number of, JAKK can be a $48-67 inventory.

Conclusion

The sell-off in JAKK appears very overdone in my opinion. The corporate turned in a stable 2023, however indicated 2024 might be more durable because of the film slate. Nevertheless, I believe they may have been downplaying the film slate a bit because it nonetheless has some good potential licensed toy alternatives this 12 months, particularly with Moana 2, which comes out round Thanksgiving. The film slate is extra This autumn weighted, however so is the toy and costume promoting season. In the meantime, the corporate will begin to see the advantages of its cope with Genuine Manufacturers start later within the 12 months.

JAKK stays one of many least expensive inventory round. If the inventory worth isn’t going to mirror this, the corporate ought to contemplate placing itself up on the market. I proceed to charge the inventory a “Sturdy Purchase” with a $50 goal, which I really feel is on the low finish of the vary of its truthful worth. I might be a purchaser on this weak spot. It is also price remembering that the final time the inventory had a giant earnings associated sell-off was practically a year-ago when JAKK reported its 2022 This autumn outcomes. Buyers who purchased the sell-off then did very properly over the following 12 months.

The most important dangers to the inventory are a weak financial system and lack of blockbuster child motion pictures hurting gross sales. Increased ocean freight prices hurting margins are one other danger. The most important catalyst for the inventory is gross sales outperforming low expectations helped by Moana 2 and different youngsters motion pictures, in addition to contributions from its Genuine Model partnership.