·Abbreviations:
o My Estimate of Fair Value (MFV)
o Return on Invested Capital (ROIC)
o Liquidation Value = Tangible Book Value (TBV)
o Book Value (BV)
o Operating Income (OI)
o Enterprise Value (EV)
o Price-to-earnings ratio (P/E)
JAKKS Pacific is a toy company. To me, that’s not particularly relevant. What’s of greatest relevance is the differential between its market value and MFV. But, before we get to those calculations, I measure the stock via a scorecard to highlight indicators that might make the stock more or less likely to be winner. Correspondingly, pros and cons as I see them.
Pros:
·The P/E is <10
o I love cheap stocks, and for others that do too, this is most likely the measure of relative value they are using
·The company is also VERY CHEAP using OI/EV (~.40), my preferred relative value measure
·The % of shares short is <5%
o Shorts take greater risk than (non-margined) longs, so I assume they’ve done some research before betting against a company
·The company’s float is between 4 and 12mm shares
o This range provides enough liquidity for my purposes, but is small enough that the stock might experience a parabolic move upward on significant buying interest
·The company does not have options, forcing those who want long exposure to buy shares
·Shares are up more than 50% over the trailing-twelve-months, which could indicate a paradigm shift for the business
·Operating Profit Margins increased sequentially and year-over-year
Cons:
·Debt/MC is >50%
·Diluted share count is up >350% over 5 years
Those pros and cons and—more importantly—the company’s average ROIC (~-7% over the last 10-years) make it seem unlikely that the company has durable competitive advantages. So, I deem the company not good quantitatively and value it relative to its liquidation value, TBV of $7.32. Given the not good designation, the company’s seemingly good balance sheet, and 5-yr average multiple of BV x 4.7**, I think TBV x 1.5 is a reasonable fair value, which equates to MFV of $10.98.
At a recent price of $15.66, the differential between market value and MFV is 43%, thus I think shares are overvalued.
Conclusion: JAKKs is interesting. It scores well on the scorecard. And, it is quite cheap as measured by P/E and OI/EV. Combine that with the upward stock move over the last year and improved Operating Profit Margins, and it is possible there has been a paradigm shift in the business and relative cheapness will result in further gains. But, I practice rules based investing to prevent myself from going in search of a narrative that would seemingly confirm that possibility. Instead, I look past the last twelve months at the long-term performance of the company, and it clearly shows JAKKs—historically—has been a value destroyer. ROIC is negative over ten years, BV growth is significantly negative over 5 years, and share dilution has been massive over 5 years. So, while it’s possible that JAKK’s now has some durable competitive advantage and profitability has turned a corner, it seems more probable that profitability will mean revert lower. In any event, the prospect of further gains from current prices is much too risky for my approach.
Technically, JAKKs fits parameters for me to at least put the company on my not good watchlist. But, the historical value destruction has been so extreme, I’m not going to bother tracking shares going forward.
My positioning: None
For more information about how and why I designate companies not good read here: (https://www.veriteventures.com/post/how-i-value-most-assets-companies)
-V
*Post prepared using data as of 12/20/22
**I’m using the company’s historical Book Value multiple as a proxy for Tangible Book because TB is <=BV and BV multiples are more readily available from data providers.
The information in this post has not been audited and accuracy is not guaranteed. The post is for informational purposes only and is not investment advice. Consult a financial professional before making investment decisions. The author’s opinions and positions may change subsequently, without notice.
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