JAKKS Pacific, Inc. Rating: Buy

Transcription

1 HARDLINE/LEISURE Jeffrey Blaeser Andrew R. Peters Company Update / Price Target Change / Estimates Change February 21, 2008 Key Metrics JAKK - NASDAQ $28.00 Pricing Date 02/20/2008 Price Target $ Week Range $31.42-$18.19 Shares Outstanding (mm) 28.2 Market Capitalization ($mm) $ Mo Average Daily Volume 436,859 Institutional Ownership 96% Debt/Total Capital 14.1% ROE 12.5% Book Value/Share $21.42 Price/Book 1.3x Dividend Yield NM LTM EBITDA Margin 6.00% EPS($) FY: December Prior Curr. Prior Curr. 2007A 2008E 2008E 2009E 2009E 1Q-Mar E 0.17E Q-Jun E 0.27E Q-Sep E 1.53E Q-Dec E 0.92E FY E 2.89E E P/E 10.0x 9.7x 9.1x Revenue($mm) Prior Curr. Prior Curr. 2007A 2008E 2008E 2009E 2009E 1Q-Mar E 140.0E Q-Jun E Q-Sep E 340.0E Q-Dec E 275.0E FY E 895.0E E 1 Year Price History for JAKK Q1 Q2 Q Created by BlueMatrix Company Description: JAKKS Pacific, Inc. ( develops, produces, and markets consumer products, including toys and related products, stationary and writing instruments, and pet toys and related products in the United States and internationally JAKKS Pacific, Inc. Rating: Buy A Hannah Montana of a Quarter; 4Q EPS up 45%; PT to $33 from $29 Investment Highlights: 4Q07 EPS Power Slam Expectations - EPS of $1.06 beats the Street consensus by $0.32. JAKKS reported 4Q07 EPS of $1.06, $0.23 above our estimate and $0.32 above the Street consensus. Sales (up 20% Y/Y and $35mm above our expectation), EBIT margins (up 200 bps Y/Y and 160bps above our expectation), and joint venture income (up $5mm Y/Y and $4mm above our expectation) all outperformed expectations. 20% 4Q sales growth - 1Q sell through appears strong. 4Q sales expanded 20% to $285mm, roughly $35mm above our and the Street consensus. CDI Disney (DIS-$32.58-NYSE), EyeClops, Hannah Montana, Pokémon, and WWE (WWE-$16.99-NYSE) all performed well, and outside of WWE, which could have a challenging comparable in 2008, could expand in New products that could aide 2008 growth include EyeClops night vision goggles, Neopets, SpongeBob SquarePants, and the Wiggles, to name a few. Sales leverage and product mix lift EBIT margins 200 bps. 4Q EBIT margins, which do not include joint venture income, expanded 200 bps to 11.6%. Gross margins expanded 110 bps with operating costs down 100 bps as a percentage of sales. While higher product/manufacturing costs in China are likely, we expect price point increases, product mix, and decreasing marketing costs, as a percentage of sales, to offset any potential increases. Cash up to $241mm - $30mm share buy-back authorized. JAKKS' cash position expanded Y/Y $57mm to $241mm and the company authorized a stock buy-back program of up to $30mm. Free cash flow was roughly $70mm in 2007 and ammunition remains robust for buy-backs and/or acquisitions. Current estimates do not reflect any acquisitions and potential deals would most likely be accretive. Raising 2008 EPS estimate to $2.89 from $2.72; introducing 2009 EPS estimate of $3.09. We are raising our 2008 EPS estimate to $2.89 from $2.72 with Y/Y sales and EBIT gains of 4% and 10%, respectively, with income from its joint venture projected to decline over 20%. Raising price target to $33; 11x 2008 P/E multiple. Based off of increased expectations for 2008, we are raising our price target to $33 from $29. Our price target reflects roughly an 11x P/E multiple on our 2008 EPS estimate. This multiple represents a material discount to its peer group multiple. Excluding the estimated EPS impact from WWE toy/joint venture sales, roughly $0.50 annually, our price target reflects a multiple in line with JAKKS' peer group. The Disclosure section may be found on pages 5-6 of this report. The Valuation section may be found on page 5 of this report.

2 JAKKS Pacific reported 4Q07 earnings per share of $1.06 yesterday. The EPS exceeded last year's comparable period of $0.73, our Street-high projection of $0.83, and the Street consensus of $0.74. Driven by action figure dolls, CDI Disney, Hannah Montana, Pokémon and WWE, to name a few, sales expanded 19.6% to $285mm, $35mm above our and the Street consensus. EBIT margins expanded 200 bps Y/Y to 11.6% based off of a 110 basis point increase in gross margins and 100 basis point decrease, as a percentage of sales, in operating costs. Joint venture income expanded roughly $6mm Y/Y. 4Q sales up 20% Y/Y - exceed expectations by $35mm Sales expanded Y/Y 19.6% to $285.1mm. These results exceeded our and the Street consensus of roughly $250mm by $35mm. The better-than-expected results were driven by action figures (WWE and Pokémon), dolls (Hannah Montana), EyeClops, role play (CDI Disney licenses), and other licenses (Care Bears and Cabbage Patch Kids), to name a few. While strong 2007 results should present challenging comparisons for 2008, existing product growth coupled with new line introductions should provide 2008 sales growth. In 2007, with growing popularity, an expanded product line, and a full year to sell the product (Hannah Montana was on the shelves for roughly six months in 2007), Hannah Montana could continue to show strong growth. EyeClops, which received strong accreditations from the toy industry in 2007, looks to build off of that success with an improved and enhanced version (BioniCam) for 2008 coupled with EyeClops night goggles. In addition to existing lines, new products that appear to be receiving strong retail receptions include Discovery Kids, SpongeBob SquarePants, Neopets, the Chronicles of Narnia, Spa Factory, and cup cake maker, to name a few. EBIT margins expand 200 basis points - could improve in 2008 Despite concerns over increasing product costs and expenses associated with outsourcing from China, JAKKS was able to expand Y/Y 4Q gross and EBIT margins 110 bps and 200 bps, respectively. Gross margins expanded due to a beneficial product mix, which included a larger percentage of higher margined licensed products, and operating costs declined, as a percentage of sales, from lower marketing costs and acquisition amortization. While rising costs associated with outsourcing form China continues to warrant watching and could increase manufacturing expenses, we believe increased price points should offset some potential increases. Other opportunities include decreased marketing costs; popular licenses are typically well known and need less advertisement, and reductions in acquisition amortization. Cash position continues to climb - up to $240mm - $30mm stock buy-back authorized JAKKS' cash position expanded Y/Y $57mm to $241mm with free cash flow in 2007 at roughly $70mm. JAKKS has a strong track record for identifying and integrating accretive acquisitions and with cash exceeding debt by $144mm, the company appears well-situated for acquisitions, should the proper opportunity materialize. Additionally, JAKKS' Board of Directors authorized a stock buy-back program of up to $30mm for the company's common stock. While we have not factored in potential acquisitions or share repurchases to our 2008 EPS estimate, we would expect both, should it occur, to be accretive to earnings and add upside potential to our estimates. Increasing 2008 EPS estimate - Reiterating Buy rating and Raising Price target to $33 We are maintaining our Buy rating on JAKKS and increasing our price target to $33. Our price target is based off of a P/E multiple of roughly 11x our increased 2008 EPS estimate of $2.89 (up from $2.72). This multiple represents a material discount to its peer group and does not reflect potential accretive acquisitions or share buy-backs that may develop in Excluding the estimated benefit from WWE toy and joint venture 2 MORGAN JOSEPH & CO. INC.

3 income, see risks section, (estimated at roughly $0.50 annually), our $33 price target would reflect a P/E multiple under 14x, roughly in line with its peer group. 3 MORGAN JOSEPH & CO. INC.

4 JAKKS Pacific, Inc. Quarterly Earnings Model (In $millions, except per share data) FY Q1 Q2 Q3 Q4 FY Q1 Q2 Q3 Q4 FY Q1E Q2E Q3E Q4E FYE FYE 2005 Mar-06 Jun-06 Sep-06 Dec Mar-07 Jun-07 Sep-07 Dec Mar-08 Jun-08 Sep-08 Dec Total Sales $661.5 $107.2 $124.0 $295.8 $238.3 $765.4 $124.1 $129.5 $318.4 $285.1 $857.1 $140.0 $140.0 $340.0 $275.0 $895.0 $931.8 % Increase 15.2% -20.4% -2.4% 26.7% 43.3% 15.7% 15.7% 4.4% 7.6% 19.6% 12.0% 12.8% 8.1% 6.8% -3.5% 4.4% 4.1% Cost of Goods Sold As % of total sales 59.7% 58.8% 60.3% 61.8% 62.9% 61.5% 63.3% 65.0% 61.0% 61.8% 62.2% 62.2% 63.3% 60.6% 62.3% 61.8% 61.4% Gross Profit Margin 40.3% 41.2% 39.7% 38.2% 37.1% 38.5% 36.7% 35.0% 39.0% 38.2% 37.8% 37.8% 36.7% 39.4% 37.7% 38.2% 38.6% % Increase 18.0% -18.5% 2.5% 20.8% 24.7% 10.5% 3.0% -8.1% 9.9% 23.0% 9.8% 16.2% 13.3% 8.0% -4.7% 5.6% 5.2% Direct Expenses As % of total sales 11.9% 13.4% 9.7% 7.4% 12.9% 10.3% 9.5% 6.9% 6.3% 10.7% 8.3% 9.4% 6.8% 6.3% 11.0% 8.3% 8.3% SG&A Expenses As % of total sales 13.5% 21.5% 19.4% 9.6% 12.5% 13.8% 21.3% 19.9% 10.9% 14.5% 15.0% 21.4% 19.8% 10.8% 14.5% 15.0% 14.9% Acquisition-shut-down costs As % of total sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Dep./Amort As % of total sales 6.1% 4.2% 3.4% 1.4% 2.1% 7.6% 3.2% 3.1% 1.3% 1.4% 5.6% 2.7% 2.6% 1.1% 1.3% 5.3% 5.0% Operating/SG&A Expense As % of Total Sales 27.0% 39.1% 32.5% 18.5% 27.5% 26.5% 34.0% 30.0% 18.5% 26.5% 25.2% 33.5% 29.2% 18.2% 26.8% 25.0% 24.7% Operating Profit Margin 13.3% 2.1% 7.2% 19.7% 9.6% 12.1% 2.7% 5.0% 20.4% 11.6% 12.6% 4.3% 7.4% 21.2% 10.9% 13.3% 13.9% % increase 63.8% -83.6% -38.7% 23.3% 83.5% 4.9% 48.1% -27.6% 11.8% 44.7% 17.0% 79.3% 60.3% 10.9% -9.2% 9.8% 9.1% Interest Income Interest Expense Income From JV Other Income/(Expense) Pretax Profit Margin 14.6% 3.1% 7.4% 19.6% 15.0% 13.8% 3.8% 5.7% 21.1% 18.0% 15.2% 5.2% 8.6% 21.6% 15.8% 15.2% 15.7% % Increase 63.5% -75.9% -41.9% 24.9% 70.0% 9.6% 45.1% -19.0% 16.0% 43.8% 23.2% 52.7% 62.3% 9.2% -15.2% 4.2% 7.9% Taxes/(benefit) Rate 34.3% 29.0% 30.4% 30.0% 35.0% 31.7% 32.0% 32.0% 29.5% 32.9% 31.1% 32.0% 32.0% 32.0% 32.0% 32.0% 32.3% Minority Interest Net Income Margin 9.6% 2.2% 5.1% 13.7% 9.7% 9.5% 2.6% 3.9% 14.9% 12.1% 10.5% 3.5% 5.8% 14.7% 10.8% 10.3% 10.7% % Increase 45.8% -76.9% -45.4% 23.6% 157.2% 14.0% 38.9% -20.9% 16.8% 48.4% 24.3% 52.7% 62.3% 5.3% -14.1% 2.8% 7.3% Interest Add Back EPS--Operations $2.06 $0.09 $0.22 $1.26 $0.73 $2.30 $0.12 $0.17 $1.45 $1.06 $2.79 $0.17 $0.27 $1.53 $0.92 $2.89 $3.09 % Increase 38.2% -72.0% -44.1% 20.5% 144.2% 11.5% 23.0% -19.5% 15.1% 44.9% 21.3% 47.5% 54.9% 5.7% -13.1% 3.3% 7.1% Shares Outstanding Source: Company reports and Morgan Joseph estimates 4 MORGAN JOSEPH & CO. INC.

5 Required Disclosures Rating and Price Target History for: JAKKS Pacific, Inc. (JAKK) as of /18/07 I:Buy:$ Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q Created by BlueMatrix Price Target Our price target is $33. Valuation Methodology Our $33 price target is based off of a P/E multiple of roughly 11x our 2008 EPS estimate of $2.89. Risk Factors WWE lawsuit over THQ License - JAKKS is currently on the receiving end of a 2004 lawsuit from the World Wrestling Entertainment (WWE) that essentially claims JAKKS and THQ bribed people associated with WWE for its joint venture license and toy line extension. The loss of $200mm in cash and the two WWE licenses, (estimated to contribute between $0.35 to $0.50 per share per year) resulting from a guilty verdict, could certainly negatively impact JAKKS' share price. JAKKS is dependent upon licensed brands. JAKKS' three largest customers accounted for 59% of its 2006 sales. Sales and operations outside the United States are subject to uncontrollable changes. I, Jeffrey Blaeser, the author of this research report, certify that the views expressed in this report accurately reflect my personal views about the subject securities and issuers, and no part of my compensation was, is, or will be directly or indirectly tied to the specific recommendations or views contained in this research report. I, Andrew Peters, the author of this research report, certify that the views expressed in this report accurately reflect my personal views about the subject securities and issuers, and no part of my compensation was, is, or will be directly or indirectly tied to the specific recommendations or views contained in this research report. Research analyst compensation is dependent, in part, upon investment banking revenues received by Morgan Joseph & Co. Inc. Morgan Joseph & Co. Inc. intends to seek or expects to receive compensation for investment banking services from the subject company within the next three months. 5 MORGAN JOSEPH & CO. INC.

6 Investment Banking Services/Past 12 Mos. Rating Percent Percent BUY [B] HOLD [H] SELL [S] Meaning of Ratings A) Buy means reasonable outperformance relative to the market over months. B) Hold means market-type risk adjusted performance; potential source of funds. C) Sell means expected to underperform the market. Other Disclosures The information contained herein is based upon sources believed to be reliable but is not guaranteed by us and is not considered to be all inclusive. It is not to be construed as an offer or the solicitation of an offer to sell or buy the securities mentioned herein. Morgan Joseph & Co. Inc., its affiliates, shareholders, officers, staff, and/or members of their families, may have a position in the securities mentioned herein, and, before or after your receipt of this report, may make or recommend purchases and/or sales for their own accounts or for the accounts of other customers of the Firm from time to time in the open market or otherwise. Opinions expressed are our present opinions only and are subject to change without notice. Morgan Joseph & Co. Inc. is under no obligation to provide updates to the opinions or information provided herein. Additional information is available upon request. Copyright 2008 by Morgan Joseph & Co. Inc. Morgan Joseph & Co. Inc. 600 Fifth Avenue, 19th Fl New York, NY Tel Fax Sales and Trading New York Tel Fax Pittsford Tel Fax MORGAN JOSEPH & CO. INC.