Toy Stock Nightmare: Mattel vs. Jakks Pacific

 | Feb 02, 2018 | 10:42 AM EST
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The mystery over Mattel's (MAT) holiday shopping season is over, and it was not pretty. I had the name on my Black Friday Watch List, and fourth quarter results which were reported after yesterday's market close, were dreadful. While much of the 12% drop in sales was expected, the company still missed revenue estimates of $1.69 billion by $80 million. The company missed badly on earnings, reporting a loss of 89 cents, well under consensus estimates of +17 cents.

Takeover talk has also subsided, although ultimately it may be the company's way out, assuming there is interest. This once formidable brand name saw solid growth in the Barbie line during the quarter (+9%), but other once popular lines continued to slide. Fisher Price revenue was down 11%, while American Girl revenue slid 21%. This remains a very fickle business, at the whims of the ever-changing tastes of kids, of which this quarter provided great evidence. You've got to imagine, though, that the Barbie and Hot Wheels lines must still be worth a pretty penny to the right company looking to build out their brand portfolio. Time will tell, but this has been an ugly period for MAT.

Speaking of ugly, toymaker JAKKS Pacific (JAKK) has also seen its fortunes continue to fall. Shares are down 50% over the past year, and more than 72% in the past 2 ½ years. Time flies, but it was just over six years ago that the company rejected a $20/share takeover bid from Oaktree Capital, which at the time owned 4.9% of the toymaker. They should have taken the money and run.

Last week it was reported that JAKK received an offer from Hong Kong Meisheng, which currently owns 18% of the company, to acquire 51% at $2.95/share. That represents a 16% premium over yesterday's close, but is embarrassingly far below what Oaktree offered back in 2011. JAKK's board reportedly has set up a committee of independent directors to review the new offer.

Markets currently view JAKK with great disdain, and the company has continued to disappoint. It does have $2 per share in cash on the books, but also $156 million in debt, $23 million of which matures this year. Currently a "double-net", shares trade at just 1.68 X net current asset value (comprised of current assets minus total liabilities), and at .91 X tangible book value per share, so expectations are very low.

Ever the dumpster diver, sometimes seeing value in owning what no one else wants to, I have initiated a small position in the name. Admittedly, this is about as speculative as it gets, is not for the faint of heart, and may not end well, but nothing ventured, nothing gained.

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