On February 15, JAKKS Pacific Inc. (JAKK) reported its fourth quarter fiscal 2010 earnings of 30 cents per share, beating the Zacks Consensus Estimate of 25 cents and showing an improvement from the year-earlier adjusted earnings of 22 cents. Given below is our report on the recent earnings announcement as well as subsequent analyst estimate revisions over short and long-term periods.
Earnings Report Flashback
During the fourth quarter, the company reported a 0.4% year-over-year decrease in revenues, which amounted to $198.0 million. However, the reported revenues fell short of the Zacks Consensus Estimate of $171.0 million.
For full fiscal 2010, earnings per share were $1.52 compared with adjusted earnings of $1.03 in 2009, while total revenue dropped to $747.3 million from $804.3 million recorded in the prior year.Earnings Estimate Revisions—Overview
Following the release of fourth quarter results, estimate revision trends among the analysts depict a negative outlook. Let’s dig into the earnings estimate details.
Agreement of Estimate Revisions
Over the last 7 days, a negative trend was palpable for the first quarter of 2011, with earnings estimates being reduced by 3 out of 5 analysts. On the other hand, none of the analysts moved in the opposite direction.
The analysts, by and large, remain skeptical about a set of headwinds that will likely affect production and shipment through the rest of 2011. These include labor issues, increased pricing pressure, and high transportation and production costs in Asia.
The pessimistic approach was more pronounced on fiscal 2011 earnings estimates with all 4 analysts reducing their estimates. The company expects cost inflation to continue in 2011.
The negative note was slightly subdued for 2012 with only 1out of 6 analysts reducing the estimate and none moving upward. Notably, 2012 is expected to gain some traction from one overseas property of JAKKS, Monsuno. This is an animated Japanese television series, likely to be on air in spring 2012. Based on this television venture, the company developed a complete Monsuno toy line, which it plans to launch next year.
Magnitude of Estimate Revisions
The magnitude of estimate revisions for JAKK Pacific has been large over the last 7 days. Following the release of fourth quarter results, estimates for the first quarter and fiscal 2011 have dropped by 10 cents each. The estimate for fiscal 2012 has been raised by three cents.
Currently, the Zacks Consensus Estimate for the first quarter is a loss of 39 cents per share. For 2011 and 2012, the Zacks Consensus Estimates are $1.39 and $1.63, respectively.
We believe the stock provides relative safety and moderate growth prospects with its new product launches, possible acquisitions, improved earnings aided by cost-saving measures, resolution of litigation and a strong financial condition to materialize such growth. Many of the company’s product launches for 2011 look much better than products of previous years.
However, JAKK Pacific is also susceptible to some challenges. The company’s business is highly seasonal with almost 30% of total revenue coming from the fourth quarter, since it is a holiday season. With this bullish period over, we do not see many near-term growth prospects due to the absence of earnings drivers. Moreover, the company purchases most of its inventory from companies in China. Hence, an expected appreciation in Chinese currency Renminbi and a rise in the effective tax rate will continue to be a haul on the company’s earnings.
JAKK Pacific currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. We are also maintaining our long-term Neutral recommendation on the stock. One of the company’s close peers Hasbro Inc. (HAS) also retains a Zacks #4 Rank.