JAKKS Pacific is finding toys to be profitable as it capitalizes on licensing agreements and acquisitions to grow its toy arsenal. The company beat on fourth quarter estimates by 41.33%. It has surprised on estimates three out of the last four quarters by an average of 14.47%. JAKKS is also cheap. It has a 2008 P/E of only 9.40.

Full Analysis

JAKKS Pacific, Inc. ( JAKK - Analyst Report ) is a multi-brand toy company, headquartered in California, that grows its product line through design, licensing agreements and acquisitions.

JAKKS, a Zacks #1 Rank (Strong Buy), markets lines under various brand names including Play Along, Creative Designs International, Toymax, Funnoodle, Go Fly a Kite, and Plug It In & Play TV Games. Its product categories include Action Figures, Art Activity Kits, Stationary, Water toys Construction Toys, Electronics, Dolls, Role Play, and Dress Up.

JAKKS, along with with THQ Inc., has worldwide publishing and marketing rights to World Wrestling Entertainment video games.

The company recently added to its licensing arsenal by signing a worldwide agreement with double-platinum American country music singer Taylor Swift. Swift has had one Number One single on Billboards Hot Country Songs list from her debut album.

JAKKS plans to launch a line of fashion dolls, role-play toys, including Swift's signature crystal guitar, accessories and craft sets that play up the world of a country music star. The company expects the product line to ship in the Fall 2008.

The company is hoping the product line is a big hit with tweens, following in the model of Hannah Montana. Swift is only 19 years old.

JAKKS has been running on all cylinders for some time. The company reported fourth-quarter earnings on Feb 20 and easily beat analysts consensus estimates by 31 cents a share, or 41.33%. Net income increased 48.3% to $34.4 million, or $1.06 per share, compared to $23.2 million, or 73 cents per share, in 2006.

Net sales increased 19.6% to $284.1 million compared to $238.3 million in the year-ago period.

"We had a more robust fourth quarter than expected, driven by strong sales of our Disney toys, action figures and Plug It In & Play electronic game products, as well as our video game joint venture. We continue to see strong sell-through in the first quarter of 2008, that we believe is due to a combination of gift card purchases and the popularity of the Disney tween pop star Hannah Montana," said Jack Friedman, Chairman and Chief Executive Officer.

The company is also expecting a hearty 2008. JAKKS saw strong positive feedback on its 2008 line from two recent toy shows in Dallas and Hong Kong and that was before signing country star Swift to the licensing agreement. The company is expanding its kids gourmet food products line, led by Cupcake Maker and Spa Factory, and has new innovations for the Hannah Montana line including new collectible fashion dolls, role play and interactive play sets and electronics.

In addition, in February, the Board of Directors authorized a stock buy-back program of up to $30 million of common stock.

Brokerage analysts responded to the great quarter by raising estimates for the first quarter and the year. In the last month, four out of six covering analysts raised consensus estimates by six cents to 20 cents per share from 14 cents per share. For the full year, six out of seven analysts raised consensus estimates by 32 cents to $2.98 from $2.66 per share.

The company is trading at an attractive valuation. Its 2008 P/E is 9.40. JAKKS' price-to-book is 1.15, which is below the industry average of 2.98. The company has a solid average five year return on equity of 11.48%.