9/22/2013

Value Opportunity? :69% off 52 week high, 82% off 5 year high

The stock is Jakks Pacific, Inc, symbol JAKK.
Jakks Pacific is a toy manufacturer started in 1995 with TTM revenues of 632.30M
This post will list some but not all of JAKK's pros and cons so you can consider as a potential investment needing further investigation. I purchased some shares.


Friday 9/13/13 JAKK closed at $4.91.


I was ranking 2013 net insider activity (total 2013 net dollar value of shares purchased-sold) as a percentage of the float value (shares in float * current price). JAKK was in the top 10 of ~ 8,000 companies reviewed.  Most of the top ten were not investable for multiple of reasons. Now to make it more interesting JAKK has aggressively reduced their outstanding share count. At the end of 2008 share count was 27.93M, 2009 = 27.64M, 2010 = 27.32 , 2011 = 25.94; the current reported share count is only 22.30M. The probability of a stock outperforming when there is a combination of both aggressive share count reduction and aggressive insider buying is optimistic. 
The large insider purchases in 2013 have been by biotech billionaire, visionary, innovator and deal maker Patrick Shiong Soon. There is an interesting story published in Forbes 08/30/2013: “Biotech Billionaire Takes A Beating ToyingAround With JAKKS Pacific”, Click to read

Patrick Soon has been buying shares of JAKK during 2013 at much higher prices.

A few comments from the Forbes article:

Patrick Soon “has a record of producing big winners. That’s what makes his big loser in Jakks Pacific so interesting. Soon is down more than 50% on his JAKK investment. He owns more than four million shares at an average cost of $11.04, according to SEC Filings”. Soon added to his initial stake in July just before the stock plunged.  Then he added more in the $7 area, taking his total stake to 25% of the company.”
Soon creates value, working with companies, by being a great visionary, innovator and deal maker. Unsurprisingly, given the net worth he has amassed, he has a record of producing big winners. That’s what makes his big loser in Jakks Pacific so interesting.
Jakks may very well be in the process of divesting their traditional toy business and morphing into a technology company.  In that case, we could be looking at a company that will be in the licensing business, with a valuation multiplier twice that of a traditional toymaker.” Source Forbes

Additional Pros:
June 2012, Oaktree Capital attempted a hostile takeover of JAKK. The $20 per share offer was rejected. It would seem management/board have many catalysts to mover the stock higher.  Insider own 16.98%.

Shaun Currie posted an outstanding JAKK article August 29 on Seeking Alpha. 

Closely followed value investors John Rogers and Richard Snow increased their position. John Rogers now owns 775,191 shares. Richard Snow owns 86,635 shares. Ben Graham investment style value investors Charles Brandes, Richard Pzena and Third Avenue Management have positions that were unchanged in their last reported positions.

JAKK stock price on Jan 2008 = 22.39, Jan 2009 = 17.43, Jan 2010 = 10.45 Jan 2011 = 16.43, Jan 2012 = 14.71, Jan 2013 = 12.88; the current price is 4.91. The dividend was suspended in 2013. The historical price performance makes it a strong candidate for mean reversion.  JAKK is sitting on 70M in cash or 3.19 per share.

Cons:

Jakks Pacific Inc announced their second quarter results with revenues of $106.2 million and net loss of $46.9 million. These unexpected horrific results have attracted multiple class action lawsuits. Another disturbing statistics is the short position continues to be reported higher every two weeks. 31.40% of the float is reported short.

Future dilution will be a drag on the stock price. Jakk did a convertible bond financing that was necessary to refinance maturing debt. The convertible holders have the option of converting to 11.4M shares at 8.75.This is about half the current shares outstanding of 22.30M.

Concerns about what shareholder legal issues, dilution and other off balance sheet liabilities in contracts could be a real overlooked negative with the stock. This may explain the larger and growing short position. So idea is speculative. I just don’t know enough at this time.

Statistical data:
Market Cap: 107.62M, Enterprise Value:  134.63M
Price/Sales:     0.18 , Price/Book:   0.86
Enterprise Value/Revenue:  0.21 , Enterprise Value/EBITDA: -4.38
Qtrly Revenue Growth (yoy):  -26.90%
Gross Profit: 197.94M , Total Cash:  69.94M
Total Cash Per Share: 3.19 , Book Value Per Share:     5.91
52-Week Change:  -67.40% , 52-Week High (Sep 24, 2012):   15.44 , 52-Week Low (Sep 17, 2013):    4.82
% Held by Insiders:    16.98%, % Held by Institutions:   89.10%
Short % of Float: 31.40%

2 comments:

stocksandflows said...

Hey,

Thanks for your blog, your posting some interesting ideas.

Regarding JAKKS, it looks interesting, but you should certainly keep one think in mind: as you wrote, its a toy company with no real blockbuster like f.e. barbie.
As a toy producer every year you are under pressure to bring out a new product that will thrill the children. It's difficult to have a product that sells well for a couple of years.
Meaning, as an investor you cannot base your investment on the current portfolio, since it doesn't even give you visibility for the next 2 years. You have to base your investment on the companies capabilities and processes.
Without meeting with insiders and having a lot of experience at valuing the operational quality of a company, I would rather not swing the bat this time.

Laurenz Seiger

ShadowStock said...

Thanks for the kind words!

I agree using the current portfolio of toys can be meaningless. They have a tremendous number of categories, brand names and portfolio of products. Some of those categories include, Pets, Interactive, outdoor, preschool, boys, and girls along with brands within those categories.

The strange and concerning issue is the growing short position reported every 2 weeks.

They still have 3.19 per share in cash and a 5.91 book value versus the market price of 4.56. Investing alongside Soon Shiong Patrick and the potential price impact of any reported good news on the stock price makes the stock interesting.
Regards
John