DocStone Pick: JAKK--CAMPAIGN
Overview
Jakk's Pacific Inc. (JAKK) is a toy company that started in 1995. They are best known for their under $10 toys including World Wrestling Federation figures, Road Champs die cast toys, and Power Rangers Turbo Vehicles. They recently purchased the Child Guidance line of pre-school educational products. Jack Friedman is the CEO, he is the former CEO of THQI. Most of the manufacturing is in East Asia. Carousel Properties represents JAKK overseas. Its sales channels are well developed with primary retailers TRUS, Wal-mart, K-mart, Kay-Bee and Target. There are 63 full time employees, including 3 executive officers.
The overall corporate strategy is to sell inexpensive, name brand toys through large national chains. Growth will come through the growing trend into education toys and the rapidly rising popularity of wrestling.
Performance
Top line growth has been rapid, from 8 million in 1995 (6 million X 4/3, 1996 was a "stub year") to 12 million in 1996 and 42 million in 1997. Cash flow has steadily increased. Earnings are growing nicely from .20 in 1996 to 0.57 in 1997.
Balance Sheet
About 6 million shares outstanding, but there was a recent private placement as well as conversion of preferred shares. Shares outstandihng should now be about 8 million. The private placement was made by the well known RENN (Rennassaince Capital) The preferred shares are convertible when the common reaches $8 7/8. Current ratio is a healthy 2:1, LTD is 31% of assets. Book value is $4 a share, operating cash is 80 cents a share. There is no spending on R&D, because Friedmann buys established lines of toys and licenses.
Valuation Indices
JAKK top line growth is a healthy 3 year CAGR of 43%. Trailing P/E is
14 and forward PE according to RedChip is 8 3/8 (estimated to be $1/share).
The Investment Idea
JAKK is trading at a deep discount to its growth rate. Perhaps that is because JAKK is a new company with only 2 years and 9 months of history behind it. Or perhaps people hate Friedmann because of how he screwed up THQI (which in all fairness, he did).
But another reason is seasonality. I once did a quant study of the stock price of video game makers and ofund that they invariably go down between 12/31 and 3/31. I am sure the same applies to any toy maker. Toy stocks just don't do well in the Winter.
So far, we have a value play and a growth play. Third, operating margins should imp[rove. With the Asian debacle, companies oeprating in East Asia should see their costs go down even more.
Fourth, Friedmann is embarking on an attempt to strip the seasonality out of the business. The pre-school toys line will hopefully accomplish that.
Fifth, their toy line is inexpensive, so sales should stay solid even in tough times. There is always money for a stocking stuffer!
Sixth, watch for more acquisitions. Jack Friedmann is a real bargain hunter, he has a knack for picking up brand name items on the cheap.
Targets
JAKK deserves a P/E of at least 20, so 20 X 1 = $20 target price by 12/31/98.
Hold through 12/31/98, then re-evaluate.
The Downside
Jack Friedmann, LOL! THQI started out gangbusters with such hit games as Home Alone 2 for the Super Nintendo. The stock price got as high as $129 at one point. But moved away form the core business of video games, sinking tons of money into "K-band modems." Yes, you could say he was ahead of his time by entering into Internet gaming. The idea flopped. He also tried to go head to head with Mattel by producing toys. Nobody bought them, THQI stock went down to pennies, resulting in a 15 to 1 reverse split when Brian Farrel took over.
Friedmann appears to have learned his lesson. He is concentrating on a few lines of proven toys, perennial favorites.
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