Despite a string of popular products and continuing good earnings, Jakks Pacific Inc. is still trying to get off the mat after being body slammed by Wall Street.
The Malibu-based toy maker is one of the country’s fastest-growing companies and has become a force in its industry, thanks largely to a profitable partnership with the World Wrestling Federation for action figures and more recently video games. But a less-than-monster holiday season is expected by retailers this year, and Jakks’ stock has suffered as a result.
The company’s share price plummeted in late September when it announced that third-quarter earnings would not meet previous expectations, due in part to slower sales of WWF toys. The stock price fell from around $19 a share to as low as $7. Last week, the stock was trading at around $9.
The downturn has come despite third-quarter earnings being quite good. The company reported net income of $9.8 million (48 cents per diluted share), up 28 percent from $7.6 million (44 cents a share) in the same period a year earlier. Revenue was $91.8 million vs. $60.2 million, representing a 53 percent increase.
It was the 17th consecutive quarter of year-on-year earnings growth, an impressive record for a company that only got its start in 1995. But it was not enough to pull the stock price back up.
“The third quarter was pretty good on a relative basis, but compared with expectations it was soft,” said Bret Jordan, director of consumer product research with Advest Inc. in Boston. “And nobody’s expecting too much from the Christmas season.”
Indeed, Jakks is suffering in part because there aren’t any big-ticket toys expected to lure parents through the doors of toy stores this year. The closest thing to a sure bet was supposed to be the introduction of Sony Inc.’s PlayStation 2 game/Internet console, but the Japanese manufacturer’s well-chronicled problems with building the machines fast enough has thrown cold water on the entire toy industry.
“Overall, it’s been a pretty dull Christmas season,” said Robert Delean, an analyst with Morgan Keegan. “You can’t buy a PlayStation 2 because you can’t find one. There are no traditional drivers. The other thing is that toy stocks typically peak around Nov. 15, even in good years. (Investors) bought (Jakks) as a Christmas play, but we’re getting near the end of the catalyst of the season, so they think, ‘What’s next?’ and sell.”
This kind of reasoning is hardly music to the ears of Jakks’ executives, who insist that their strategy of finding good niches and steadily growing profits will continue to serve them well, even if Wall Street doesn’t recognize it.
“We’re disappointed in our stock price, but as long as we perform, we believe the stock price will follow,” said company President Stephen Berman.
Berman points out that his company, despite its solid earnings growth, has been affected by the woes of the two largest toy makers in the country, Mattel Inc. and Hasbro Inc.
Hasbro’s third-quarter profits plummeted, while Mattel, still hampered by its now-divested acquisition of The Learning Co., posted a net loss of $337 million in its third quarter. Analysts agree that with the Big Two on the ropes, it’s hard for anyone else to build much investor interest.
“Jakks is in better shape than those two, but in a related tough market,” Advest’s Jordan said.
Analysts praise the company’s efforts to diversify. While Jakks doesn’t break out the numbers itself, Jordan estimates that WWF-related toys once comprised upwards of 60 percent of its business but now hovers at around 35 percent. In its place are items ranging from plush toys to large educational foam puzzle pieces with numbers or letters, along with tie-ins with the Cartoon Network’s Power Puff Girls and action figures based on the hit “Charlie’s Angels” movie.
“Our business isn’t based on home runs,” Berman said. “Our business is based on singles and doubles, and if we get a triple or a home run, that’s great. But we’re looking for evergreens,” in other words continuous money-makers.
One such evergreen looks to be Jakks’ joint venture with another West L.A. company, THQ Inc., concerning WWF-related video games. While demand for the wrestling action figures has waned, the same cannot be said for the game titles.
“Kids are not going to stop playing these video games,” analyst Delean said.
On another front, Jakks recently acquired pen and school stationery maker Pentech, helping generate back-to-school revenue. Jakks is folding Pentech into another acquisition, lunch box maker Flying Colors, which will produce what could be a real money maker for the company arts and crafts products tied into the upcoming film based on the popular Harry Potter character.
