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We currently maintain our Underperform rating on Malibu, California-based JAKKS Pacific Inc. (NASDAQ:JAKK) due to the absence of any significant driving factor in the stock. The negative bias was based on a host of factors including lower seasonal demand, which would lead to losses in the first quarter, increasing input cost and macroeconomic issues.

JAKKS Pacific reported fourth quarter 2010 earnings of 30 cents per share, a nickel ahead of the Zacks Consensus Estimate and above the adjusted earnings of 22 cents in the prior-year quarter. On a GAAP basis, the company reported earnings of 30 cents compared with a loss of 7 cents in the fourth quarter of 2009.

On the downside, during the quarter, the company reported a 0.4% year-over-year decrease in revenues, which amounted to $198.0 million. However, the reported revenues were ahead of the Zacks Consensus Estimate of $171.0 million.

JAKKS Pacific’s business is highly seasonal with most of the revenue coming from the third quarter and particularly the fourth, which is the holiday season. Since, the holiday period is over and JAKKS Pacific’s upcoming quarter is seasonally weak, we do not see many near-term growth prospects due to the absence of earnings drivers. The company expects to report a loss in the first quarter of 2011.

Fluctuation in exchange rates remains a cause of concern for the company. The majority of the world’s toys are produced in China. The company also has wholly owned subsidiaries in China. Hence, any negative change in its currency or downturn in the economy will adversely affect the top and bottom lines. Post fourth quarter earnings, management expressed apprehensions that the appreciation of the Chinese currency Renminbi (NYSEARCA:RMB) will be a drag on the stock.

Moreover, management is concerned about several issues that will likely affect production and shipment in the rest of 2011, including labor issues, increased pricing pressures and transportation costs. Wage inflation in China also remains another cause for concern. Moreover, the company expects cost inflation to continue in 2011.

Magnitude - Consensus Estimate Trend

During the last 60 days, estimates fell 11 cents and 9 cents, respectively, for the first quarter and full fiscal 2011. The current Zacks Consensus Estimates are a loss of 40 cents for the first quarter reflecting a significant year-over-year decline and earnings of $1.40 for fiscal 2011 reflecting a year-over-year decline of 11.47%. The company’s competitors include Hasbro Inc. (NASDAQ:HAS) and Mattel Inc. (NASDAQ:MAT) JAKKS Pacific currently retains a Zacks #5 Rank, which translates into a short-term ‘Strong Sell’ rating.

Source: JAKKS Continues to Underperform