Hey James, here is some info I got on JAKK yesterday!!
10:19am EST 24-Feb-99 Morgan Keegan (Bob DeLean 901-524-4191) JAKK
RECORD EARNINGS REPORTED; GOLDEN OPPORTUNITY TO BUY THIS YOUNG GROWTH COMPANY
Morgan Keegan & Company, Inc.
Research Notes
February 24, 1999 52 Wk Range $18 - $7
JAKKS PACIFIC, INC. Inst. Ownership 18%
JAKK* - $17 Mgt. Ownership 18%
Avg. Daily Vol.(000) 116
Market Cap.(mill) $133
Current Chg. From Debt/Capital 14%
Rating: O-S Book Value $4.82
EPS: 12/97A: $0.52 Price/Book 3.5x
12/98A: $0.89 FY99E EBITDA/Share $2.13
12/99E: $1.21 $1.16 Price/FY99E EBITDA 8.0x
12/00E: $1.87
Rpt. Date Range
Q4:98: $0.21A vs. $0.11 Feb. 23 First Call: $0.16 vs. $0.12 $0.13-$0.17
Q1:99: $0.15 vs. $0.08 First Call: $0.13 vs. $0.08 $0.10-$0.15
Q2:99: $0.18 vs. $0.14 First Call: $0.19 vs. $0.14 $0.17-$0.21
Q3:99: $0.62 vs. $0.45 First Call: $0.63 vs. $0.45 $0.58-$0.65
Q4:99: $0.26 vs. $0.21A First Call: $0.25 vs. $0.16E $0.21-$0.28
RECORD EARNINGS REPORTED; GOLDEN OPPORTUNITY TO BUY THIS YOUNG GROWTH
COMPANY
JAKKS Pacific, the Malibu, California based toy developer, reported FY98
EPS of $0.89 vs. $0.52 in the year ago period. Sales of $85.3 million
increased 103% and were $1.3 million ahead of our expectations. The
sales breakdown was roughly; WWF - 45%, wheels (Road Champs & Remco)
25%, pre-school (Child Guidance) 22%, and Fashion Dolls 8%. Every
category exhibited sales growth in FY98, which we believe demonstrates
the strength of the JAKKS business model.
Gross margins (GMs) increased by 590 basis points to 40%. Part of the
increase is mix related as WWF products have the highest gross margins.
The higher revenue numbers also provided a boost to GMs because royalty
expense and amortization of tools/molds are classified as cost of sales
and these two categories are primarily fixed.
SG&A expense increased by 750 basis points to 31.7%. We believe several
items were expensed in the quarter that could have remained on the
balance sheet, representing management's conservative accounting
orientation. For example, while sales increased 87.5% for the quarter,
deferred product development costs, actually declined by 70% (from
$807,600 to $237,900). Similarly, advance royalty payments and prepaid
expenses only rose by 22% each to $307,500 and $789,700, respectively.
We would expect these current asset accounts to increase in proportion
to the level of sales growth. In short, we believe at least $1 million
in current asset balances were 'flushed' (expensed) through the income
statement in 4Q98 and this would account for about 420 basis points of
the increase. We believe that since management knew they would beat
Street estimates anyway, they decided to cleanse the balance sheet of
future expenses, providing for a smooth start to FY99. In essence, the
company booked a reserve by following conservative accounting
principles.
Interest & other expense at $325,000 was slightly higher than our
expectations as the 'other' expense line included some disposal of fixed
assets. The interest line should come down in the second half of FY99
as JAKKS forces conversion on $3 million of its private placement
convertible debentures. At a closing common stock price above $16 for
20 consecutive days, JAKKS has the option of calling in the issue, which
in essence forces conversion. That 20-day period should be satisfied at
today's closing. The remaining $3 million in convertible debentures can
be called in at a stock price above $20 for 20 consecutive days. The
retirement of the initial $3 million will generate an after tax cash
flow savings of about $193,000 annually. This action will result in no
further dilution as the converted shares are already included in the
diluted share count.
Taxes - The tax rate for the year came in at 22.6%, which is a continued
increase from 12.1% in FY96 and 18.7% in FY97. The earlier years
contained NOL carry-forwards, which have now expired. Because the
annual tax rate was several points lower than expected, the 4Q98 tax
level, a plug number, was only $138,000 or 8.3% of pretax income.
Because the fourth quarter contains this unusual tax rate, we believe it
is more useful to compare net earnings on a year-over-year basis. To
perform an apples-to-apples comparison between FY98 and FY97 requires
the use of a standard tax rate, which makes the earnings gain stronger
no matter what tax rate is used. Going forward management is projecting
an effective tax rate in the 26%-28% range.
MANAGING THE BALANCE SHEET
Accounts Receivable - Receivables increased a modest 36%, which relative
to the 87.5% increase in sales reflects excellent cash flow management.
Days sales outstanding (DSOs) a further measure of receivables
management, declined to 51 days vs. 76 days a year ago. We cannot
emphasize strongly enough the magnitude of these improvements. We
believe they reflect the strength of JAKKS freight-on-board (FOB)
business model and its subsequent reliance on a letter of credit payment
requirement.
Inventory - Inventory levels actually declined slightly from year ago
levels to $1.9 million and this decline drove inventory turns to 27x
from 13x in 4Q97. A decline in absolute inventory levels is almost
unheard of for a business that grew sales by 87.5% quarter to quarter
(4Q). Days of inventory on hand are at only 13 days, which is extremely
low by any comparison, and we again credit the business model which
relies almost exclusively on outsourcing.
Debt / Capital - The debt level is at about 14%, but will decline
further as the convertible debentures are converted. With an exercise
price of only $5.75 per share, the convertible could be considered
equity now ($11.25 per share in the money), which would reflect 0% debt.
In summary, the balance sheet is clean, and we believe JAKKS is well
positioned moving into FY99. We are making some adjustments to our
quarterly estimates for FY99. Our new estimates move to $0.15, $0.18,
$0.62, and $0.26, from $0.11, $0.18, $0.63, and $0.25, respectively.
Collectively, this takes our FY99 estimate to $1.21 from $1.16.
Finally, while management outlined its intention, to distribute one WWF
wrestling video game for the Nintendo 64 and one wrestling GameBoy title
in 4Q99, we are not yet modeling for any revenues from this development.
JAKKS is coordinating this guidance with its joint venture partner, THQ
(THQI - $23 7/16), and we expect guidance in the next 2 weeks. We
believe these 2 wrestling related games have the potential to contribute
$0.08 to $0.15 to JAKKS 4Q99 EPS, and this video game contribution is
not yet in our estimates.
We rate shares of JAKK Outperform and believe the stock has great
potential. Our 9-12 month price target is $24 per share, which assumes
multiple expansion to 20x our FY99 estimate of $1.20.
Bob DeLean / Craig T. Weichmann, CFA Toys
& Entertainment
901-524-4191 / 901-529-5435
bob.delean@morgankeegan.com / craig.weichmann@morgankeegan.com
ADDITIONAL INFORMATION AVAILABLE UPON REQUEST
* Morgan Keegan & Company, Inc. makes a market in the shares of this
security.
The information contained herein is based on sources considered to be
reliable but is not represented to be complete and its accuracy is not
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author at this date and are subject to change without notice and are not
a complete analysis of every material fact respecting any company,
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directors, shareholders, employees and affiliates and members of their
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