JAKKS Jacks It Up

I've got my Eye-Clops on this one. Toymaker JAKKS Pacific (Nasdaq: JAKK) released an earnings report yesterday that even Geppetto would be happy to hear. Finally, we heard a story all about toys, rather than recalls, lead, and harm to kids that play with them.

Thanks to a bunch of musclebound guys and a meek 15-year-old girl, Jakks reported a 20% increase in revenue and a 48% surge in profits compared to last year's fourth quarter. The licenses it holds for World Wrestling Entertainment (NYSE: WWE) and Hannah Montana -- the pop singer/actress/wondergirl sensation of Disney (NYSE: DIS) -- were the drivers of growth this year, and they seem to be keeping JAKKS in play.

Like Hasbro (NYSE: HAS), JAKKS hasn't suffered from any toy recalls because of lead paint, or any of the other miseries that mired toymakers last summer. However, its WWE license has been jacked away, since the two have been battling it out in court over royalty payments. While the federal lawsuit has been dismissed, the wrestlers have sucker-punched JAKKS and given the license to Mattel (NYSE: MAT) instead. This may pose a hurdle for JAKKS, but it won't be arriving anytime soon. The current contract runs through 2009, and JAKKS will be able to sell off product through 2010. That's three more years of putting more profits in a headlock.

JAKKS won't be bereft of any wrestling goons once the WWE leaves the ring, however. The toymaker signed up the WWE's much smaller, privately held rival, TNA, which will launch just as the WWE deal ends. Sure, the outsized personalities in the wresting world have built up the "sport" over the years, but JAKKS' strength in the action-figure wresting-toy line certainly has helped revitalize pro wresting. I'd say Mattel's getting a gift of JAKKS' years of marketing here, but I wouldn't underestimate JAKKS' ability to help TNA grow.

If the toymaker was just wrestlers and Hannah, I might have concerns about the company as an investment. Wrestling's popularity has turned south before, and Hannah's got to graduate high school someday. Fortunately, JAKKS possesses a few evergreen properties that continue to perform, in addition to having the knack for producing a host of must-have toys.

The Eye-Clops, one of last year's top toys, is a powerful electronic magnifier that now includes a USB port, so that it can be used like a digital camera. This year, JAKKS has night-vision goggles that not only really work -- I've tried them out; they're that good -- but are also priced at an affordable $100. Kids are going to be crazy for these.

At just 11 times 2008's earnings, JAKKS is selling at a slight discount to either Mattel or Hasbro. Sure, it's much smaller than its rivals. The $857 million in revenue it made for all of last year is less than what Mattel realized in its weakest quarter. Yet JAKKS has a depth of product -- Hannah, Pokemon, its own in-house-developed Plug It In & Play line -- that puts it on equal footing with the competition.

With Wal-Mart (NYSE: WMT), Target (NYSE: TGT), and Toys "R" Us accounting for nearly 60% of its sales, JAKKS also has a distribution channel, which assures that its must-have toys will be able to find their way into the hands of willing consumers. This is an investment you don't need a bionic eye to see.

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