CORPORATE FOCUS—Focus on Lower-End Helps Shares of Toy Maker Climb

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Summary


Business:

Designer/developer of liscensed toys


Headquarters:

Malibu


CEO:

Jack Friedman


Market Cap:

$449 million Dividend Yield: N/A*


Total Liabilities:

$44.2 million P/E Ratio: 14.7


Long-Term Debt:

$1 million

* Jakks Pacific does not pay dividends.

While many retailers anticipate a lackluster holiday season, Jakks Pacific Inc. projects a strong end to what’s been a banner year.

The year-end alchemy for the marketer of action figures, writing instruments, lunch boxes, plush toys and dolls is due to a number of factors, not the least of which is a share of the merchandising for Warner Bros.’ blockbuster “Harry Potter” film.

Jakks shares closed Nov. 20 at $22.55, just shy of its 52-week high of $23.91 reached on Nov. 15, and three times its level last holiday season.

Stephen Berman, president and co-founder of the Malibu-based company, said Jakks would have a strong fourth quarter because 70 percent of its products retail for less than $10.

“We have top name-branded products at lower prices, which adheres to more of the economic environment during recession periods,” he said.

Brett Hendrickson, an analyst with L.A.-based B. Riley & Co. said that at $7 a share, Jakks was especially undervalued last holiday season. This year, he said, the company is better positioned than competitors like Mattel Inc. and Hasbro Inc.

“What management has done is put together another good year of solid growth and gained credibility on Wall Street,” he said. “They’re a little safe haven in a sea of turbulence.”


In line with projections

Jakks reported net income for the third quarter ended Sept. 30 of $10.9 million (56 cents per diluted share), compared with $9.8 million (48 cents) in the like year-earlier quarter. Third-quarter revenues were $92.8 million vs. $91.8 million in the third quarter of 2000.

For the year, Jakks expects net income of $30 million to $32 million on revenues of $290 million to $300 million. That compares with net income of $28.6 million on revenues of $252.3 million a year ago. And it’s in line with analyst estimates.

Among its most popular products is a World Wrestling Federation-branded video game for Sony’s PlayStation 2, which was released Nov. 19. Jakks produces video games using the WWF license for various consoles in collaboration with software company THQ Inc.

It already has launched the corresponding WWF video game for Nintendo’s Game Boy Advance and expects to release the game for Microsoft’s Xbox console in late December, Berman said. The WWF game for Nintendo’s GameCube should be out by the first half of next year.

In addition, Jakks makes crafts and activities sets and toys for the movie “Harry Potter” as part of a licensing agreement it made last year with Warner Bros. The value of the “Potter” license lies in products that are skewed to 12- to 14-year-olds the age bracket more likely to be interested in the book and movie.

Berman isn’t banking on a lone blockbuster film to carry its bottom line. He pointed to the writing utensil and stationery lines it manufactures for sale at non-toy retailers like Bed Bath & Beyond Inc., Walgreen Co. and Kroger Co. that keep Jakks’ quarterly revenue relatively even throughout the year.


‘Not a home run company’

At the same time, the holiday season is big for Jakks, which also sells to top toy retailers like Toys R Us Inc. and Wal-Mart Stores Inc.

“We’re not a home run company,” Berman said. “Our philosophy has been hitting singles and doubles. If something is a home run, that’s great, but we don’t bet the ranch. That’s why we’ve had consistent growth and have been profitable since inception for six years and grown our business soundly.”

Jakks recently received a $50 million syndicated line of credit from a consortium of banks led by Bank of America NA. The line of credit boosts Jakks’ cash reserves to $123 million.

That makes Jakks ready for more acquisitions. Since its founding in 1995, the company has acquired eight companies and will continue to seek further acquisitions, Berman said. It now has 240 people in four locations and 4,500 customers.

Despite Jakks last-minute decision to pull out of a deal to buy 21st Century Toys Inc. in August, the company likely will make one or two more acquisitions during the next 12 months, Hendrickson said. He could not speculate on specific acquisition targets.

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