JAKKS Pacific, Inc. (JAKK)

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With product launches, possible acquisitions, strategic partnerships, resolution of litigation and a strong financial condition, JAKKS Pacific, Inc. (JAKK) is well poised for long-term growth. However, a tough retail environment leading to lower domestic product sales and a decline in product orders before the crucial holiday season compel the company to cut its fiscal guidance.

Additionally, decelerating margins, a top- and bottom-line miss in the third quarter of 2012, unfavorable product mix and wage inflation in China add further worry. The uncertainty around the upcoming presidential election and the fiscal cliff in the U.S., along with global economic turmoil due to the Eurozone crisis will likely keep consumers preoccupied and less inclined toward entertainment activities.

Hence, we maintain our Underperform recommendation on the stock. Our six-month target price of $12.00 equates to about 24.5x our estimate for 2012. The target price implies an expected negative total return of 5.6% over that period.

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