JAKK - Jakks Pacific

[krazeenyc]

Jakks Pacific is the (distant 3rd) 3rd largest toy maker in the US. They have 2 main lines of toys : Traditional Toys - action figures/dolls/etc. and Role Play/Seasonal/Novelty -- Princess dress up, Halloween Costumes, etc.

 

They did a great job growing their business for most of the last 10 years, but they've really hit a bump in the road (or worse) over the past couple of years. Their strategy has been to acquire small toy makers at attractive prices and fold them into their business.  For the most part they don't have their own franchises (think Transformers for Hasbro), one franchise they launched was Monsuno which has been a bust so far domestically but doing fairly well internationally. 

 

Oaktree offered $20 a share back in 2011/2012 but were rebuffed and Jakks ended up doing a tender at that same price and bought back $200 million of shares (at 2x today's price ).  Clinton group pushed Jakks to sell to OAK but failed and ended up selling their entire position.

 

They have a new venture that is debuting in October of this year that seems promising called Dreamplay Toys.  If you google it you'll get a pretty good idea of what the tech does -- but the analysts on the conference calls seem super confused about the product. Dr Patrick Soon the billionaire who founded Nantworks the partner for dreamplay has acquired 14% of the outstanding shares. It seems to me that Dreamplay has a ton of potential.  Anyways anyone else looking at Jakks thoughts? thx.

 

 

[jschembs]

This business looks ugly. It has not generated a return on capital above 10% in the last decade, and gross margins are trending downward. Not even close in my view to having a margin of safety to consider as a value investment. Their rebuff of Oaktree signals to me the management team/BOD likes defending their interests.

[krazeenyc]

Of course things look bad. That's why their down 50% over the last year/2. Gross margins are tricky because in some cases Jakks will pay XYZ company  a licensing fee which includes a minimum -- and if sales tank -- due to the minimum guarantees -- gross margins look terrible.

 

I also agree of course that management tried to entrench themselves while Oaktree attempted to buy them. But what do you think Oaktree saw in Jakks at 2x the current share price.  Also keep in mind, I assume that management was already working on the Dreamplay deal with Nantworks at the time.

 

 

[shhughes1116]

Long time since someone posted on this...

 

They just posted their recent quarterly results and had a better than expected quarter.  They upped their EBITDA guidance range  to $51~$53 million (from $43-$45 million) and upped their revenue guidance range to $750-$760 million (from $660-$670 million).  They just finished a bit of restructuring, so margins have improved, sales have improved (in part due to Frozen) and thus more money is dropping to the bottom line.

 

After announcing results, stock dropped from ~$8 to ~$6.50...I suspect part of the sell-off is due to poor communication on the part of the CEO and CFO (very apparent from the text transcript), as well as concern that Frozen is driving their improved results and this will be a short-lived phenomenon. 

 

Anyways, company has about $140 million debt, $152 million in equity, so EV/EBITDA is ~5.2.  Probably a fair price for a small toy company, unless you think that Disney is in the early innings of a new Princess dynasty which should drive continued growth at JAKK's. 

 

Anyone long here?  And if so, why?  Just curious...I have been following this stock for some time, but haven't pulled the trigger because I'm not convinced the EV/EBITDA multiple justifies the risk associated with this company.       

[Patmo]

Diluted share count jumped from ~23mil to ~45mil. If it weren't for that, share price would be relatively attractive. Historical earning power at current share count is about $1.25 IF you count only positive years. Currently trading at 5x that.  Not cheap enough for me yet, given quality of co. If share price takes a 50% cut from here, I'd revisit for a more thorough look.