JAKK

[David Randolph]

The toy sector has been positively surprising Wall Street, as you can see on the two industry giant charts, Hasbro and Mattel:





So I'm interested in JAKK, a smaller but fast growing player in the toy sector. Let me make the usual fundamental analysis.

1. Study for the dilution factor estimate



The share count has been increasing at a 2.2% rate since 2004, but this quarter the company reduced the number of convertible debentures and warrants outstanding significantly, because the # of shares outstanding on a fully diluted basis diminished 14.2%:



The number on the left is Q1 2007 out yesterday and the number on the right is Q1 2006. The current market cap is $744 M.



JAKK's balance sheet is healthy, with a 4.34 current ratio and cash and equivalents accounting for 52% of total current assets.

Given all this I'll assume a dilution rate of 1% a year, so the dilution factor in my valuation model will be 1.01.

2. Study for the revenue CAGR estimate



Revenue has been growing at a 34.3% average annual pace since 2003, to $765 M in 2006. For 2007 the company's guidance is $800 M, but I believe they can beat their guidance, as they've been doing lately. For 2008 analysts are expecting just $790 M in revenues, which I believe is completely ridiculous, because JAKK never had a year on year revenue decline, why should it have one in 2008? I put $850 M on the chart but it can be a lot more.

So, we have 34% historical revenue growth and 0% expected from Wall Street analysts. I'll shoot in the middle of it and get a 17% revenue CAGR estimate.

Also note the difference between JAKK's price to sales ratio and its industry average. JAKK is trading at a deep discount given this fundamental analysis metric.

3. Study for the net profit margin estimate



Over the past 10 years the net profit margin has been quite stable, with all profitable years. The average net profit margin was 9.84%, so that's going to be my estimate for the future.

Look how JAKK is trading at 11 times earnings and the Toys & Games industry average is 24.38, so JAKK seems to be 54% undervalued. It would need to rise 117% to be valued at the industry average, in terms of earnings multiple.

4. Study of the EPS multiple estimate

I don't see any reason why JAKK shouldn't be valued according to its industry peers, even more so since JAKK is growing a lot faster than the industry (34.3% growth for JAKK and just 5.3% for the industry). So, my EPS multiple estimate is 24.38 which is the industry average.

Considering all this, my valuation model looks like this:



I see a 56.5% share price CAGR and an estimated share price of $101.94 three years from now. I consider this very attractive.

Trading Plan:

Buy JAKK, 6.66% of capital as always.

[yukiii]

Hmmmmm
I been in and out of JAKK for the past 7 years.
Its overvalued at $25 not much growth here.
Will go up some end of year Passssss

[David Randolph]

Hmmmmm
I been in and out of JAKK for the past 7 years.
Its overvalued at $25 not much growth here.
Will go up some end of year Passssss

There has been growth. But with a trailing P/E of 11 you don't need growth. Why do you say it is overvalued?

Thanks

[yukiii]

Hmmmmm
I been in and out of JAKK for the past 7 years.
Its overvalued at $25 not much growth here.
Will go up some end of year Passssss

There has been growth. But with a trailing P/E of 11 you don't need growth. Why do you say it is overvalued?

Thanks

It always trends down in May till October then its a buy, probably going to $22 then back up again to$27.

$2.30 last year $2.39 this year and that the whole story. Timing is wrong.........

[wxmang]

Hey guys..

It seems in the last two weeks or so, when David picks a new stock, it just gets hammered the day of or a few days later.   
Almost like, short term traders are shorting David's picks.
I learned after the TZOO tankage, to wait a few days on David's picks.
I have been getting absolutely hammered the last two weeks.
The sad thing is...  the DOW is setting daily records.
It's like a shift from Small Cap Value into Big Cap Growth stocks.
Anyone contemplated this thought?

Wxmang

[jorgegr]

In this 10 year chart I don't see what you point out. Sometimes it's
exactly the opposite.
Although it shows we approached a historical high resistance area

[David Randolph]

It always trends down in May till October then its a buy, probably going to $22 then back up again to $27.

Always? Well, fundamentals are stronger now, I expect the stock to breakout to a new all time high around $30 in 2-3 months time.

$2.30 last year $2.39 this year and that the whole story. Timing is wrong........

My take is the company will beat $2.39. It previously said Q1 2007 EPS would be $0.07-$0.10, it came in at $0.12 (this is the seasonally the weakest quarter). $2.30 2006 EPS means the earnings multiple is 10.85 now. Hard to find a cheaper stock than this one, especially if you consider the growth rate.

As for timing, yes, I bought the stock today and it went down 6%, but I don't consider +/- 5% or 10% a timing mistake. If I start being concerned and trying to predict 5% moves I'll miss the big picture and won't make money at all over the long term.

Thanks for your view yukiii, time will tell.

[David Randolph]

Hey guys..

It seems in the last two weeks or so, when David picks a new stock, it just gets hammered the day of or a few days later.   
Almost like, short term traders are shorting David's picks.
I learned after the TZOO tankage, to wait a few days on David's picks.
I have been getting absolutely hammered the last two weeks.
The sad thing is...  the DOW is setting daily records.
It's like a shift from Small Cap Value into Big Cap Growth stocks.
Anyone contemplated this thought?

Wxmang

Over the last couple of weeks the Main Portfolio had a perfectly normal 6% drawdown. But still, the portfolio is up 17.9% in 2007 and the S&P 500 is up just 5.3%. I believe we're on track for a 30 - 40% year. You just entered at a bad time, at least, that has been the history. Please wait a couple of months more before jumping into conclusions.

Thanks for your testimonial

[yukiii]

It always trends down in May till October then its a buy, probably going to $22 then back up again to $27.

Always? Well, fundamentals are stronger now, I expect the stock to breakout to a new all time high around $30 in 2-3 months time.

$2.30 last year $2.39 this year and that the whole story. Timing is wrong........

My take is the company will beat $2.39. It previously said Q1 2007 EPS would be $0.07-$0.10, it came in at $0.12 (this is the seasonally the weakest quarter). $2.30 2006 EPS means the earnings multiple is 10.85 now. Hard to find a cheaper stock than this one, especially if you consider the growth rate.

Try WPCS much better growth and a steal at $13.00.

[BigSully1]

Hey guys..

The sad thing is...  the DOW is setting daily records.
It's like a shift from Small Cap Value into Big Cap Growth stocks.
Anyone contemplated this thought?

Wxmang

Yes, I commented on one of the other threads a few days ago about how the smaller caps have recently finally begun to underperform the large caps. If you look at the chart of the Russell 2000, it's really struggling to break into new highs from it's Feb high. Compare that with $INDU $SPX $NDX
I think it's definitely something to be aware of.

http://stockcharts.com/h-sc/ui?s=$RUT&p=D&b=5&g=0&id=p08468882119

[yukiii]

Hey guys..

The sad thing is...  the DOW is setting daily records.
It's like a shift from Small Cap Value into Big Cap Growth stocks.
Anyone contemplated this thought?

Wxmang

Yes, I commented on one of the other threads a few days ago about how the smaller caps have recently finally begun to underperform the large caps. If you look at the chart of the Russell 2000, it's really struggling to break into new highs from it's Feb high. Compare that with $INDU $SPX $NDX
I think it's definitely something to be aware of.

http://stockcharts.com/h-sc/ui?s=$RUT&p=D&b=5&g=0&id=p08468882119

Yep you don't want to be in most small caps only large cap intl companies or value plays with high growth in this economy. I am mostly in oil, materials, europe, asia, south america and large global us companies like UTX JOYG . You know what they say about go away in may, this year it will apply to micro and small caps.

[BigSully1]

Hey guys..

The sad thing is...  the DOW is setting daily records.
It's like a shift from Small Cap Value into Big Cap Growth stocks.
Anyone contemplated this thought?

Wxmang

Yes, I commented on one of the other threads a few days ago about how the smaller caps have recently finally begun to underperform the large caps. If you look at the chart of the Russell 2000, it's really struggling to break into new highs from it's Feb high. Compare that with $INDU $SPX $NDX
I think it's definitely something to be aware of.

http://stockcharts.com/h-sc/ui?s=$RUT&p=D&b=5&g=0&id=p08468882119

Yep you don't want to be in most small caps only large cap intl companies or value plays with high growth in this economy. I am mostly in oil, materials, europe, asia, south america and large global us companies like UTX JOYG . You know what they say about go away in may, this year it will apply to micro and small caps.

I think maybe you're jumping the gun and misunderstanding what I'm trying to get across. I'm not at all saying that you don't want to be in small caps, just to be aware of the recent performance lag and use some caution. According to Prudential Equity Group, small caps tend to lag their big cap brethren in the first month after a spike in volatilty, but after 6 months, returns favor small caps. It makes sense, doesn't it?

In the current situation though, the small caps outperformed and showed what I thought to be incredible resiliency in the first month after Feb 26 and only lagging in just the last 3 or 4 weeks.

Richard Moroney, editor of "Dow Theory Forecasts" and UpsideStocks" newsletters, still argues a bullish case for small caps in his April 1 edition of "UpsideStocks." Unfortunately, I would have to get permission to reprint copyrighted material here though.

Seems that you're trying hard to convince others to sell the portfolio, but that's alright, I'm always intertested to hear the bearish case if backed up by good arguments, and  I really like to hear Davids responses...brilliant.

Will you be right? I don't know, but I'll wait until the market tells me that or when you can produce a much more compelling argument. Keep trying.

[nexta]

Dear All,
I don´t understand right your discuss in English, sorry...
IMO US economy is very weak now, USD is unsafe currency and it is not in relation with next and next peaks in U.S. stockmarket and with enthusiasm of new highs of indexes-that is unbelievable for me and I have fear of crash there in stockmarket.
It is because I´m not interested in big players. I would rather to know an opinion or some your estimation, what will small caps do in background of stockmarket collapse.
Probably no visionary is here, but you are profesionals what I´m not. I would like to ask you for some reflection about potential impact such situation into David´s 3-years analyses.
And - what to do to don´t have investments in USD currency? Is there possibility to buy these 3SOF picks on Deutsche Borse for example?
I hope my text is quite understandably, sorry for my English once more.
Nice weekend!
nexta

[David Randolph]

Try WPCS much better growth and a steal at $13.00.

Indeed, at first sight WPCS seems quite attractive, it's a pity volume is so low and the company diluted shareholder's value a lot in the past. But thanks for the tip, I'll cover it ASAP

According to Prudential Equity Group, small caps tend to lag their big cap brethren in the first month after a spike in volatilty, but after 6 months, returns favor small caps. It makes sense, doesn't it?

Yes, it makes sense. I'm trying to select specific stories that will probably outperform, big or small cap, it doesn't matter (just that a small company probably has a better chance of growing faster than a $10 B - $200 B market cap company).

Dear All,
I don´t understand right your discuss in English, sorry...

No problem nexta, I'm an European too (Portuguese), and my English could be better, but with some time and practice you'll see you understand and will be able to write anything you want. English is the easiest language in the world (but it could be even easier in my view).

IMO US economy is very weak now, USD is unsafe currency and it is not in relation with next and next peaks in U.S. stockmarket and with enthusiasm of new highs of indexes-that is unbelievable for me and I have fear of crash there in stockmarket.

This would lead to a very extensive discussion nexta. Just three points: 1) Cyclical slowdowns didn't spoil previous bull markets, like the 1990-91 economic recession in the US didn't damage the long term bull market that started in 1982 and lasted until 2000. 2) The US dollar decline helps US based global companies. Their sales and profits, which are reported in USD, rise when  the dollar declines. The USD won't decline forever, in fact, I'm starting to think it is undervalued at this point. 3) Crashes and bear markets usually start when the economy is pretty hot, not when it is cold. If you look at all previous crashes, they always happened when everybody was optimistic about the economy, like the 1929 crash, the 1987 crash or the 2000 bear market. You need to be a bit of a contrarian to predict bull and bear markets.

It is because I´m not interested in big players. I would rather to know an opinion or some your estimation, what will small caps do in background of stockmarket collapse.
Probably no visionary is here, but you are profesionals what I´m not. I would like to ask you for some reflection about potential impact such situation into David´s 3-years analyses.

The only impact would be on the 4th variable of the valuation model, the EPS multiple would contract if there were a bear market or a stock market crash. But my individual picks would probably still be attractive in such an event.

And - what to do to don´t have investments in USD currency? Is there possibility to buy these 3SOF picks on Deutsche Borse for example?

It would be the same. If you buy the stock in euros it won't rise as much as it will do in USD, if the euro rises against the USD. Companies are worth the same, it doesn't matter if their stocks are in USD or euros, and the NYSE valuation usually leads all others.

You can hedge your exposure to the USD using the forex market, but I wouldn't do that if I were you. If you want to measure your returns in euros and you expect the USD to fall, say, 5% in 2007, you just take out 5% of the returns I expect for the Main Portfolio in USD terms and you get your expectation in euro terms.

I hope my text is quite understandably, sorry for my English once more.
Nice weekend!
nexta

Nice week nexta, don't worry about the quality of your English, from what I've been experiencing Americans are very tolerant in this aspect, or else I couldn't have this job

As for JAKK, I know the stock went down 6.2% on Friday, but that is meaningless to me. The company made $2.3 EPS in 2006 and it is very conservative in its 2007 EPS estimate of $2.39. It's forward earnings multiple is just 10.4, so this is one of the cheapest companies outthere, and it has been growing nicely. The CEO had the following to say about 2007:

"We are pleased with our first quarter performance and believe we are well positioned to achieve our record sales and earnings expectations for 2007," said Jack Friedman, Chairman and Chief Executive Officer, JAKKS Pacific.

I also enjoy some of the company's new products a lot, like the following:

«Stephen Berman, President and Chief Operating Officer, stated, "During the first quarter, we launched several new well-performing products and line extensions, including our TV Game product based on the hit NBC game show, Deal or No Deal(R).»

I'll keep holding JAKK.

[David Randolph]

Stocks sometimes trade in such strange ways over the short term. Here lyes a fast growing US based company (but selling throughout the world) with a trailing EPS multiple of 10.4, which is extremely attractive in my view.

I'm not going to read anything from the last two trading days and will classify them as "short term noise". I'll maintain my long term projections and will keep holding JAKK.