International Expansion And Licensing Will Deliver Opportunities Amid Tariff Risks

Key Takeaways

• International expansion and product line innovation could mitigate tariff impacts and improve net margins.
  
• Licensing deals with major franchises like Disney and DreamWorks are expected to boost future earnings.
  
• Continued reliance on Chinese manufacturing exposes JAKKS Pacific to tariff and supply chain risks, affecting costs, margins, and sales growth potential amidst external economic pressures.

Catalysts

Designs, produces, markets, sells, and distributes toys and related products, consumer products, kids indoor and outdoor furniture, costumes, and sporting goods and home furnishings space products worldwide.

• JAKKS Pacific's international expansion plans, focusing on markets like Europe, Latin America, and Asia Pacific, aim to mitigate U.S. tariff impacts, potentially boosting future revenues.
  
• The company's efforts to innovate product lines with manufacturing outside of China could reduce production costs and improve net margins over time.
  
• Developing lower-priced product lines to cater to value-conscious consumers may sustain sales volumes and help maintain or improve gross margins.
  
• Strengthening relationships with existing factory partners and exploring alternative sourcing opportunities may drive efficiencies, thereby positively impacting margins.
  
• JAKKS Pacific's focus on lucrative licensing deals, leveraging partnerships with major franchises (e.g., Disney, DreamWorks), anticipates driving higher future earnings.

JAKKS Pacific Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming JAKKS Pacific's revenue will grow by 3.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 5.1% today to 4.5% in 3 years time.
• Analysts expect earnings to reach $34.6 million (and earnings per share of $2.87) by about May 2028, down from $35.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.1x on those 2028 earnings, up from 6.2x today. This future PE is lower than the current PE for the US Leisure industry at 18.7x.
• Analysts expect the number of shares outstanding to grow by 3.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.66%, as per the Simply Wall St company report.

JAKKS Pacific Future Earnings Per Share Growth

Risks

• Continued dependency on manufacturing in China poses risks due to tariffs and supply chain disruptions, which could increase production costs and impact net margins.
  
• Tariff issues in the U.S. are likely to persist, leading to higher consumer prices and potentially reducing demand, affecting revenue growth.
  
• External economic factors, such as potential recessions and wider economic instability, could dampen consumer spending on toys, directly impacting sales and earnings.
  
• Heavy reliance on licensed film properties for sales growth creates vulnerability if movie releases underperform or if competition intensifies, potentially impacting future revenues.
  
• Limited ability to shift manufacturing outside China could constrain cost reduction efforts, affecting the company's ability to maintain competitive pricing and profit margins.

Valuation

• The analysts have a consensus price target of $43.0 for JAKKS Pacific based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $765.5 million, earnings will come to $34.6 million, and it would be trading on a PE ratio of 18.1x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of $19.46, the analyst price target of $43.0 is 54.7% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.