We reaffirm our Neutral recommendation on JAKKS Pacific Inc. (JAKK) following appraisal of its fourth quarter 2012 results. Despite sluggish results in the fourth quarter, Jakks Pacific’s long-term potential keeps us on the sidelines.
Why the Reiteration?
JAKKS Pacific’s adjusted loss in the fourth quarter of 2012 was substantially wider than the Zacks Consensus Estimate and the year-ago level. Revenues also fell short of the Zacks Consensus Estimate as well as year-ago numbers. Lower domestic product sales amid a difficult retail environment led to the top- and bottom-line miss and year-over-year decline.
Several of its key products lacked demand in the fourth quarter of 2012. Basically, JAKKS Pacific has become a victim of the change in children’s play pattern in recent years battling a broad array of alternative devices including MP3 players, tablet, smartphones and other devices.
Moreover, JAKKS expects the first quarter of 2013 to be weaker year over year due to incremental expenses related to the launch of the DreamPlay product line and the Maui Toys acquisition. Management expects the DreamPlay line to contribute marginally to 2013 sales
Despite these factors, the company’s long-term potential prevents us from being bearish on the stock. Management remains optimistic on the DreamPlay toy line, which is set to hit the market in 2013. The line should benefit the company in the long run with full product and content launches into 2014 and 2015.
JAKKS Pacific has also undertaken some restructuring activities and is consolidating its operations to lower occupancy costs, increase efficiencies and profitability in the near term.
Additionally, the company is on an acquisition spree. Jakks Pacific’s latest acquisition of Maui, a manufacturer and distributor of spring and summer activity toys, is expected to be accretive to 2013 earnings. Hence, at the current level, we prefer a wait and see approach.
Other Stocks to Consider
Some players in the leisure and recreational products industry, which look attractive at current levels include Smith & Wesson Holding Corp (SWHC) and Sturm, Ruger & Co. Inc. (RGR) carrying a Zacks Rank #1 (Strong Buy) and Brunswick Corp. (BC) carrying a Zacks Rank #2 (Buy).
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