We came across a bullish thesis on JAKKS Pacific, Inc. (JAKK) on Substack by Inflexio Research. In this article, we will summarize the bulls’ thesis on JAKK. JAKKS Pacific, Inc. (JAKK)’s share was trading at $34.07 as of Feb 14th. JAKK’s trailing and forward P/E were 11.79 and 8.71 respectively according to Yahoo Finance.
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Jakks Pacific, a toy company trading at a remarkably low valuation of under 6x earnings, represents a compelling investment opportunity with significant upside potential. Currently priced at $27.70 per share, the company’s earnings power is expected to soar to $7.00 per share by 2026/2027, driven by its improving operations and diverse business strategy. Despite its strong growth trajectory, Jakks remains undervalued, with 25% of its market capitalization held in net cash and an impressive 15% free cash flow yield, positioning it well for future growth. The upcoming acceleration in earnings, set to begin in Q1 2025, is expected to be fueled by several key business wins and the ongoing transformation of the company under new management.
Jakks has undergone a significant turnaround under new leadership, the company reduced its reliance on a few key suppliers and diversified its portfolio, driving revenue from $520 million in 2020 to $712 million in 2023. EBITDA surged from $18.9 million in 2019 to $75 million in 2023, while net income flipped from a negative figure in 2019 to a positive $4.62 per share in 2023. The management team has also been diligent about reducing debt, trimming over $184.5 million during the pandemic. By the end of 2024, Jakks is expected to hold a net cash balance of between $80 million and $95 million, equating to around $24 per share in equity accretion.
A key driver of Jakks’ recovery and growth is its new licensing agreements and partnerships, which have expanded its market presence beyond its traditional reliance on Disney IP. Notably, Jakks has successfully transformed its relationship with Sega, turning its Sonic franchise into a global powerhouse, contributing nearly 10% of Jakks’ revenue. The company’s involvement with the success of Nintendo’s Mario Bros. movie, where it holds the toy license, further strengthens its future prospects, with additional movie adaptations on the horizon to drive toy sales. Jakks’ partnership with Authentic Brands Group (ABG) to manufacture products for its portfolio of brands marks another major step forward. This collaboration is expected to reduce the company’s seasonal dependence and expand its retail coverage, potentially adding over $100 million to Jakks’ topline in the coming years.
The company has also expanded its footprint with major retailers like Walmart and Target, which have increasingly sought Jakks’ affordable and high-quality products. Additionally, Jakks has made strides in international markets, opening new distribution centers in Italy and Mexico, which could drive a 10-15% topline boost over the next 3-5 years.
Looking ahead, Jakks’ future prospects are bolstered by an exciting slate of upcoming movies, including highly anticipated releases such as Toy Story 5 (2026), Mario Bros. 2 (2026), and Frozen 3 (2027), along with sequels to Moana and Encanto. The company’s improved market positioning, especially in the wake of a competitor’s recall, presents a strong near-term catalyst for market share gains.
Jakks’ balance sheet and management strategy are now aligned for long-term value creation, and with its recently lifted restrictions on capital return, investors could see shareholder returns through dividends or share repurchases. The stock’s upside potential is significant, with earnings power expected to rise substantially in the coming years. With an 8x multiple on $7 EPS, the stock could reach $56, but even under more conservative projections of $4.00-$5.00 EPS in 2024-2025, the stock remains attractively priced with a target price of $40. Despite a strong Q3 2024 performance, the market has lowered expectations for Q4, creating a buying opportunity, particularly given Jakks’ solid free cash flow and diversified supply chain. Risks such as tariffs on Chinese-manufactured toys and box office performance are manageable, and with its clean balance sheet and strong growth prospects, Jakks Pacific represents an exceptional risk/reward investment at its current valuation.
JAKKS Pacific, Inc. (JAKK) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 12 hedge fund portfolios held JAKK at the end of the third quarter which was 9 in the previous quarter. While we acknowledge the risk and potential of JAKK as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than JAKK but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.