JAKKS Pacific Goes to the Mat

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JAKKS Pacific (Nasdaq: JAKK) delivered results for the third quarter yesterday. The report contained good news on some important metrics. Net sales for Q3 more than doubled, coming in at $206.1 million versus $90.3 million in 2003. Net income, including stock options compensation, was $23.8 million ($0.88 per diluted share) against last year's $9.6 million ($0.39 per diluted share), representing a gain of nearly 149%. Net profit margin -- the ratio of net income to net sales -- increased by a point (11.6% compared with 10.6%). Earnings guidance was raised, with the new expectations at $1.85 to $1.90, instead of $1.75 to $1.80 (these expectations do not take into account options charges).

Rick Munarriz made a good call on JAKKS in an article he wrote more than a year and a half ago on stocks that were cheap but had a lot of value. Back then, the stock was trading under $10 per share; the shares would eventually reach a 52-week high of more than $24.

Even so, JAKKS closed yesterday's session down more than 22%. One of the big drivers of punishment is the risk posed by the lawsuit that World Wrestling Entertainment (NYSE: WWE) has filed against the company (go here to read WWE's contentions, and here to read JAKKS' response). This obviously renders prognostication on the company's earnings as a somewhat tenuous exercise.

Here's another concern: those joystick games. CEO Jack Friedman dubbed the performance of its TV Games toys a "dramatic success." He's right: They're very popular, and I get a kick out of them myself. (For those who don't know, there's a new kind of video game that allows consumers to hook a joystick device directly into a TV or VCR and play pre-loaded games, which are often perfect emulations of classic arcade properties such as Pac-Man and Galaga.) I am worried that this category is becoming hypersaturated way too quickly; there are so many varieties out now -- ones based on Activision (Nasdaq: ATVI), Disney (NYSE: DIS), and Atari properties -- and there are many, many more on the way. How soon before the fad passes, though? That's something else that is probably on the minds of JAKKS investors.

So, what should an individual do? If you've been looking at JAKKS as a potential investment, I think you're right to do so, but hold off on initiating a position. I would wait a bit more to see how the litigation is shaping up. There's value to JAKKS Pacific, in my opinion, as I believe it is a competent licensee and marketer of toy products. As always, though, each investor must perform his or her own due diligence and not rely on a single opinion.

For more Takes on toys and games:

• Check out LeapFrog Enterprises' (NYSE: LF) leap back.
• Will there be no holiday for Hasbro (NYSE: HAS)?
• Let's get serious about games.
• See why Mattel's Barbie has the blues.

Fool contributor Steven Mallas owns shares of Disney.