This morning, JAKKS Pacific (NASDAQ:JAKK) reported Q1 results. The release revealed a slight miss on the top and bottom line, but investors needn't become too preoccupied with small variations in Q1 results. Institutional investors often call Q1 a "throwaway quarter" for toy companies. Indeed, it is the least significant, quantitatively and strategically. In JAKK's case, Q1 represents just 12% of its 2016 guidance.
What's more notable, is that JAKK bought back so many shares that it made the net loss look $0.05 per share lower than it actually was. Without the buyback, "earnings would have been a loss of $0.96 per share, in the middle of the range of previously announced guidance for the quarter." The accelerated buyback activity should demonstrate that management was unfazed by the modest shortfall it was facing during the quarter.
Further validating this point, management also reiterated guidance for the year ($800.0 million; EPS +10% to $0.78, and adjusted EBITDA +28% to $65.0 million), which is a guide-up for the remaining quarters of 2016.
The EBITDA number is huge for investors. JAKK accelerated their buyback during Q1, dropping the share count to 17.2M. So, the stock is trading for ~3x adjusted EBITDA. At 8x adjusted EBITDA, I believe JAKK would still be an accretive acquisition for Hasbro (NASDAQ:HAS) or Mattel (NASDAQ:MAT). That would represent more than $20 per share, by my calculations.
So, it should come as no surprise that they accelerated their stock buyback during Q1. Between June and December, they bought back 1.5M shares of common stock, but bought back over 1.3M shares in the March quarter alone (plus, $2M of their convertible bonds).
Despite this, JAKK still had cash and cash equivalents of $118.9 million as of March 31, 2016 (up $13.6M vs. last year). That's very good vs. its ~$120M market cap, but MUCH better than it seems, because the company has bought back $25M of stock and bonds during that time frame.
In other words, they've been generating a lot of cash. "Net cash provided by operating activities for the first quarter was $32.6M", compared to $38.8M last year's Q1. With activist investors heavily involved, the increased cash should lead to increased buyback activity.
FYI, at quarter end, only about $5M remained available in the current buy-back authorization. In other words, they tore through the buyback in less than a year.
Investors should also note that inventory levels have been lowered and accounts receivable have been almost cut in half. Also, property and equipment has been 85% depreciated. The current ratio is well over 3 (1 is considered healthy!). Net debt is down to $89M from 107M last Q1.
In other words, the balance sheet is quickly getting lean (and is probably understated by millions of dollars). With the lower share count and lower net debt, JAKK's enterprise value inputs are progressing rapidly. The change in net debt + share buybacks was $41M....
...so JAKK is on pace to essentially buy itself out in 5 years (essentially a 20% yield)!
So, it was a slight miss, yes... but with a big buyback twist. The stock remains very much undervalued based on its cash generation and rapidly changing capital structure. As a result, I expect activist investors to push for a refreshed buyback program to keep the ball rolling.
Disclosure: I am/we are long JAKK.
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