JAKKS Pacific: Relative Undervaluation Makes It A Buy

Portrait of a girl playing with siblings at home

JAKKS Pacific Has A Christmas Shopping 2022 Tailwind

FG Trade/E+ via Getty Images

After the September 12 euphoria that gave JAKKS Pacific, Inc. (NASDAQ:JAKK) a 52-week high of $27.83, it now trades below $20.50. The 25% decline means many are likely profit-taking. I think this trend could continue for the next few weeks. In spite of these profit-taking dips, JAKK’s YTD gain is still +93.69%. It is probably prudent to cash out on the massive YTD gains.

massive YTD gain of JAKK

Seeking Alpha

My contrarian view is you should average down on JAKK. This toys-centric company could rebound to $27 because of this coming Christmas shopping season. Parents and godparents will spend big on toys to make their beloved kids happy.

As per the World Bank, there are approximately 1.98 billion children aged 14 and below. Christmas is a giant sales booster for JAKKS Pacific’s diverse set of toys/entertainment products.

The many toy categories of JAKKS Pacific

JAKKSdotCom

Christmas Shopping Catalyst

This Christmas tailwind could help JAKKS wrap up Q4 2022 with $250 million in sales. JAKK’s stock shot up +40% because it posted Q2 new sales of $220 million, +96% YoY. JAKKS Pacific will report its Q3 numbers this coming late October. A big beat on revenue could help the stock bounce back above $25.

Based on the chart below, JAKK has a great change of delivering revenue growth for Q3 and Q4 2022. The upward pattern is obvious. Sales of toys and other related products benefit from the post-COVID tailwind.

increasing quarterly sales of JAKKS Pacific

MacroTrendsDotNet

Deloitte estimates that 2022 holiday retail sales (November to January) will be $1.45 trillion to $1.47 trillion. The toys and related products are estimated to be worth $361.04 billion. The gift-giving Yuletide tradition means of that, $361 billion will probably be generated during this October to December.

the toys business is a growing industry

Statista Premium

More often than not, stronger quarterly sales eventually lead to stronger earnings per share. Thanks to father Christmas, JAKK could achieve a Q4 EPS of $3.15 or higher. JAKK’s trip back to above $25 could be faster if it delivers consistent EPS growth while also boosting its sales.

Relative Undervaluation Should Be Exploited

The easy thing to do is to take profits on JAKK while it still trades above $20. On the other hand, it might also be profitable to average down on JAKK. The 25% discount has aggravated its relative undervaluation against its peers. There’s a prevailing market bias against JAKK Pacific. It is a golden opportunity to go long on JAKK while the stock market only gives it a TTM GAAP P/E valuation of 3.69x.

grave undervaluation of JAKK makes it a buy

Seeking Alpha Premium

As small as it is, JAKK deserves more respect from the investing public. Like its much bigger rivals, Mattel (MAT) and Hasbro (HAS), JAKK’s core business is selling toys to boys and girls. It is a market abnormality that JAKK’s TTM Price/Sales valuation is only 0.26x. This is significantly lower than MAT’s 1.61x and HAS’s 1.51x.

This gross undervaluation is unjustified. JAKKS Pacific is actually posting a better revenue CAGR than Mattel or Hasbro. The TTM revenue CAGR of JAKK is 35.20%, much higher than MAT’s 13% and HAS’s 9.25%. Smaller firms always have the better growth potential than their larger, maturing peers.

JAKKS is growing faster than MAT and HAS

Seeking Alpha Premium

The number one rule in evaluating a stock is to see if it has tangible improvement in its growth performance. As per the chart above, JAKK’s management was able to improve on the average 5-year revenue CAGR of 2.30%. The estimated forward CAGR of 11.86% could be outperformed. JAKK’s publishing only needs to license more IPs from famous video games.

Licensing And Monetizing Top-grossing Video Games

JAKKS Pacific is profiting from making Apex Legends action figures, accessories, and replica weapons. More investors might go long on JAKK if it also starts selling the same products under PUBG, Roblox, Valorant, and Mobile Legends: Bang Bang branding.

Adults and kids who spend money on Valorant or Mobile Legends hero skins are ideal targets for JAKKS-made action figures and stuffed toys. Licensing the right to make toys/accessories/costumes of the world’s top grossing video games could help JAKKS Pacific achieve annual sales of $1 billion or more.

The potential income from selling stuffed toys and action figures/weapon replicas to gamers is huge. Refer to the chart below, gamers spent $2.01 billion on PUBG mobile. Some of those paying players could afford JAKKS-made $49.99 replica versions of the most popular guns on PUBG Mobile.

top grossing video games 2021

BussinessofAppsDotCom

JAKK’s need to beat that projected forward revenue CAGR of 11.86%. Going big on video games-themed toys, accessories, and costumes is an easy long-term expansion strategy.

Making and selling toys for the big spenders of the video games industry could lead to better profitability. It is the downside risk of JAKK. The business of selling toys is a low-margin endeavor. The quantitative rating algorithm of Seeking Alpha gives JAKK a profitability grade of B+. This is because JAKKS Pacific’s TTM net income margin of 7.30% is already 26% higher than the Consumer Discretionary sector’s average of 5.77%.

low margins of selling toys

Seeking Alpha Premium

If you don’t like the low-margins handicap of the toys business, then you might want to find other stocks to buy. Going forward, JAKK is unlikely to achieve double-digit net income margins.

Final Thoughts

JAKK’s investment quality is better when its brand partners are not just Disney (DIS) and Apex Legends. A strong push on licensing and monetizing top-grossing video games could be a strong catalyst for JAKKS Pacific.

The global video games industry is huge. People will spend $235.7 billion on video games this year. The toys-centric wagon of JAKK should be hitched to the fast-rising star of video games.

video games industry is fast-growing

PwCdotCom

JAKK is a buy because some adults still buy and collect toys. JAKKS-branded PUBG weapons or Roblox action figures are appealing to big-spending gamers regardless of their age.

Efficiency-wise, JAKK touts a Piotroski score of 6.0, higher than Mattel’s 4 and Hasbro’s 5. JAKKS Pacific is a great-value investment that happens to be efficient in its chosen line of business.

JAKK has higher Piotroski score than MAT and HAS

Finbox Premium

The most compelling reason to go long on JAKK is its obvious potential as a future takeover target. Mattel could add $766 million to its $5.45 billion annual sales if it buys JAKKS Pacific. I think the 0.25x Price/Sales valuation of JAKK makes it an easy acquisition target. The current market cap of JAKK is less than $200 million. Disney has almost $13 billion in cash. It might also notice JAKKS Pacific as an affordable takeover option in my opinion.

Be the first to comment

Leave a Reply

Your email address will not be published.


*