Last week, GE Capital Corporate Finance announced it would be serving as an administrative agent for JAKKS Pacific Inc. (JAKK, Financial), which will be receiving a $75 million senior secured credit facility. The financial help, directed towards corporate purposes and capital expenditures should be of great help to the toy designer and manufacturer, since 2013 was a rough year on earnings, and cash flow hit a historical low point with losses of over $32 million. However, the company seems confident it can turn results around and following management’s optimistic claim about 2014, several investment gurus like Paul Tudor Jones (Trades, Portfolio) and Jim Simons (Trades, Portfolio) hedge fund have bought JAKKS stock. So, let’s see what this toy designer has in store for the future.
Will 2013’s Challenges Be This year’s upside?
JAKKS hasn’t had the best of luck when it comes to product launches and financial earnings in the past, and the current anaemic economic situation has put yet another strain on consumer spending in the U.S. and Europe. But 2014 might be the growth year this toy manufacturer has been waiting for. After 2012’s row of acquisitions, including Maui Inc. (July 2012), JKID Ltd. (September 2012), a joint venture with NantWorks LLC to develop technologically orientated toys, and a 50% joint venture with the Japanese animation production firm, Pacific Animation Partners, has helped the firm gain significant brand strength, which should help boost top and bottom line growth. The most recent expansion of the Daniel Tiger’s Neighborhood franchise, which has been very successful since its holiday season launch and will now be available at Target Corp. (TGT, Financial), Kmart and Barnes & Noble Inc. (BKS, Financial), should also contribute to sales growth.
Moreover, the company’s product launches throughout 2013 improved substantially, with Disguise’s new Halloween costumes, kids’ furniture, Tollytots infant and preschool products, Outdoor Engineer Sports products and Maui Toys’ Impulse line driving sales. The recent integration of technology and novelty in its product launches, via Dream Play and Technology Kid, has received positive responses from customers and I think this angle could provide the base for JAKKS's future profits. The firm’s international efforts are also impressive, and 2014 should be a prime year for profits in this segment, as the firm obtained rights for the Sofia doll line in Latin America, Australia, Taiwan and China, while Walt Disney Company (DIS, Financial)’s Princess doll sales remain strong in Europe.
Valuation
With 2013’s weak financial results in mind, it’s no surprise that JAKKS is focused on turning its losses around into profitability. Earnings per share posted a $2.43 loss for 2013, while the third quarter showed a $0.50 loss. And despite quarterly revenue growth of 3.1% year over year, due to improved sales in the Novelty, Role Playing and Seasonal toy segment, annual revenue declined by 5.0%, closing at $632 million. However, EPS has returned to an upward trend, and investors should expect 2014 to show profitability, with EPS ranging between $0.30 and $0.40. The company’s aggressive restructuring plan and cost saving initiatives, which include reduction in leased space, employees and overhead expenses, should help regain momentum throughout 2014, leading to growing revenue and margin expansion.
However, I must point out that 2013’s restructuring plan also led to the suspension of JAKKS's quarterly dividend, making competitors like Hasbro Inc. (HAS, Financial) and Mattel Inc. (MAT, Financial) much more attractive investment options, given their consistent dividend increases. Nonetheless, I believe JAKKS has the potential to regain its financial strength in the long term, and the stock’s price of $7.2 is much cheaper than its rivals, making it a cheap investment. Therefore, patient investors looking for long-term growth might be surprised by this company’s future profitability.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.
