JAKKS Pacific (JAKK) Stock: A Power Up Star Catalyst In 2023

JAKKS Pacific, Inc. (NASDAQ:JAKK) is a toy and leisure products designer, marketer, and distributor recognized among the top six players in the U.S. The company has experienced a sort of renaissance in recent years, driven by momentum in a series of licensing deals with several premier global brands and companies like The Walt Disney Co. (DIS) and Nintendo Co., Ltd. (OTCPK:NTDOY).

Indeed, even amid the challenging macro backdrop, the stock was a big winner in 2022, climbing more than 60% on record earnings. JAKKS benefited from the success of movie premiers like Disney’s “Encanto” and “Sonic the Hedgehog”, distributed by Paramount Global (PARA), which drove demand for its toys and related merchandise like Halloween costumes.

Looking ahead, 2023 could be poised to be another blockbuster with a revival of the “Super Mario Brothers” franchise that not only gets a big-budget animated theatrical release but also the launch of a dedicated theme park at “Universal Studios Hollywood” operated by Comcast Corp. (CMCSA).

In our view, JAKKS is well-positioned to capture a new wave of growth through its Super Mario Bros products portfolio as a catalyst for earnings that appears to still be under the radar. Overall, there’s a lot to like about JAKK which trades at a discount to industry peers and is supported by solid fundamentals. Assuming the Super Mario movie connects with children and toy consumers, we see an upside for the stock going forward.

JAKK Key Metrics

JAKKS last reported its Q3 earnings in November, with the headline EPS of $3.80 beating expectations by $0.78. Revenue of $328 million, climbed by 36.3% year-over-year and also came in significantly above estimates.

The context here considers a shift in a delivery schedule to avoid lost sales as was the case in 2021 which faced holiday shortages last year. In effect, toy product sales got pulled forward into Q3, adding to that topline and earnings. On this point, management’s full-year guidance for revenues to climb 20% over 2021 implies a -53% decline y/y in Q4, highlighting the quarterly volatility with sales being recognized a bit earlier this year.

Nevertheless, the takeaway is that the underlying business is strong, with year-to-date trends up 7% compared to total net sales for all of 2021. This is impressive against what was a historically strong period for consumer spending boosted by stimulus last year.

From the conference call, management projected optimism for continued long-term growth, citing data suggesting market share gains while recognizing a more challenging environment for retail amid ongoing macro headwinds.

Over the trailing twelve months, the adjusted EBITDA margin at 11% is up 240 basis points compared to 8.6% through the period last year, reflecting the underlying profitability.

Another important theme for the company is an ongoing effort to reduce debt. The company ended the quarter with $77 million in cash and equivalents and $68 million in total financial debt, down from $96 million at the start of the year. We view the balance sheet and cash flow trends as strong points in the company’s investment profile.

JAKKS Super Mario Brothers Movie Toys

We mentioned the Super Mario Brothers movie, which has a scheduled theatrical release date of April 7th in the United States. With a cast that includes some “A-list Hollywood” voice actors like Chris Pratt, the expectation is that the animated film jump-starts a franchise more recognized in the video game world.

As it relates to toys, JAKKS and Mattel, Inc. (MAT) both have licensing deals with Nintendo which means both companies will likely launch film-specific exclusives, although both have been otherwise vague regarding specific plans thus far.

During the last earnings conference call, management only cited general existing Nintendo toys as selling “exceptionally well” including in international markets. There was also a comment suggesting an expectation in sales of big-ticket items from Nintendo portfolio items like playhouses ramps up this quarter.

Considering JAKKS is about one-sixth smaller than Mattel, generating around $850 million in sales over the past year compared to $5.5 billion for Mattel, the argument we make is that the property is materially more important for the company in terms of overall sales contribution. By this measure, JAKKS stands to benefit incrementally more from what could be a boom to related Super Mario products in 2023, in our opinion.

Beyond the movie, the timing in 2023 also coincides with the grand opening of “Super Mario World” at the Universal Studios Hollywood theme park earlier in February. A second location in Florida is also planned to open in 2025. In our view, the Super Mario Bros property could be emerging as a goldmine for JAKKS which effectively gets a free lift from the marketing machine provided by the larger global corporations. The tailwind should be expected to continue for several years, capturing several holiday seasons and even Halloween costumes.

The setup here provides some upside to consensus estimates, particularly if the catalyst is not yet recognized completely by Wall Street and investors. The current forecast is for sales to fall -4% in 2023, which is in the context of an exceptionally strong 2022 and management comments suggesting some pulling forward of sales between Q3 and Q4.

On the earnings side, the market sees EPS climbing 4% in 2023 followed by a stronger 11% rebound in 2024 with an expectation that margins rebound. Again, the bullish case here is that these estimates prove to be too conservative, with the biggest impact from a Super Mario boost coming into the second half of 2023.

We estimate that a very strong reception to the movie translating into toy and costume demand could add $5 million incrementally to the topline for 2023 translating into around $1 million in extra profit or $0.10 to EPS based on recent operating leverage trends. At this level, 2023 earnings growth would reach 6% year-over-year growth compared to the current 3% estimate.

In terms of earnings, a key takeaway is that JAKK is trading at a deep discount to peers, with a 2x EV to forward consensus EBITDA or 4.5x its 2022 EPS estimate. This compares to a P/E closer to 12x for Mattel and Hasbro, Inc. (HAS).

One explanation is that JAKKS’ reliance on licensing deals with only small proprietary brands like “Creepy Crawlers” justifies the spread. This is in contrast to Mattel which owns “Barbie”, “Hot Wheels”, and “Fisher-Price”, which command higher margins. Hasbro, for its part, owns brands like “Monopoly” and “Play-Doh” as its marquee.

That being said, we believe there is room for the spread to narrow or converge higher, with JAKKS’ trend of financial execution warranting a re-pricing higher.

JAKK Stock Price Forecast

We rate JAKK as a buy with a price target for the year ahead at $23.50, representing a 6x multiple on the current consensus 2023 EPS. The call here is that shares can gain momentum ahead of the media coverage surrounding both the Super Mario theme part and the movie in Q1. The potential that the company surprises to the upside in terms of earnings over the next few quarters should be positive for the stock.

From the stock price chart, we like the setup here with shares under $17.00, which have returned to an area of technical support as a good entry point. To the upside, a break above $18.00 would get the bulls back in control.

In terms of risks, there is always the possibility that sales underperform or even that the Super Mario Bros movie flops at the box office. In this scenario, the performance of JAKK would be more closely tied to global macro trends, with some sensitivity to consumer spending indicators. On this point, signs of a deteriorating economy and rising unemployment would undermine the bullish case for the stock. Monitoring points over the next few quarters including the trends in financial margins and momentum in international markets is an important strategic development.