Is Topps at the Top?

Topps showed improvement in its third-quarter performance. Should you collect some of its shares?

Steven Mallas
Steven Mallas
Jan 4, 2007 at 12:00AM

Topps (NASDAQ:TOPP), the famous seller of trading cards and confections, competes with a strong roster of brands that includes big-leaguers such as Hershey (NYSE:HSY), Cadbury Schweppes (NYSE:CSG), Wrigley (NYSE:WWY), and Tootsie Roll (NYSE:TR). But even so, the company reported a vast improvement in its operations when it released its third-quarter earnings report yesterday. Let's check out the stats.

Revenues for the quarter increased 8% to $78.7 million. Topps' operations took in $4.7 million this year, versus a loss of $1.3 million last year. Net income also reversed a loss, as the third quarter generated $3.7 million ($0.09 per diluted share) as opposed to the red ink of $3.7 million ($0.09 per diluted share) in the previous timeframe. Those numbers include discontinued operations; backing them out, we see that the comparison becomes $0.09 per diluted share in 2007 against $0.00 per diluted share in 2006.

Topps has seen strength in its business from recent initiatives aimed at a repositioning for future growth. The company stated that its intent is to better market its trading-card products to kids. That's especially important as entertainment technologies such as MySpace and video game consoles vigorously compete for kids' attention and income. In addition to hooking kids on the hobby of card collecting, Topps also states that, as part of a three-pronged strategy, current hardcore enthusiasts will be a priority, as will a control on product proliferation.

Net sales for U.S. sports-card operations increased 11%. Confectionary sales experienced a 15% rise -- a performance driven by the popularity of such brands as Juicy Drop Pop and Megamouth spray. The earnings release does, however, caution shareholders that domestic candy sales may experience some difficult times in the near term.

Here's something that's as disappointing as not finding that rare card you've been chasing pack after pack -- Topps didn't supply a cash-flow statement. Checking the latest 10-K, however, shows that, while cash from operations in fiscal years 2004 and 2005 was positive at approximately $12 million and $23 million, respectively, fiscal 2006 saw operating activities consume $6.5 million in cash.

So how is Topps faring as of late? The most recent 10-Q shows that, for the six-month period, the company generated more than $10 million in operational cash; it used up $3.3 million in the year-ago period. That's heartwarming, since the company had more than enough to cover capital costs and dividend obligations via that financial flow.

Topps has endured some rough times. As Rich Duprey pointed out in his Foolish Forecast analysis the other day, the company had been hampered by a discontinued operation last year. When Stephen Ellis covered earnings back in September, he found a decline in the bottom line. He also mentioned that Topps was a much stronger company in terms of net profit back in 2001. So, considering recent bad history, one might be inclined to look favorably upon the current quarter. In addition, both revenue and earnings expectations were beaten, since Wall Street was looking for $76.3 million for the top line and $0.06 per share for the bottom line.

The shares rallied 6.7% yesterday to close at $9.50. The current yield on the stock is approximately 1.7% -- that's not high enough, in my estimation, to compensate investors for putting portfolio capital to work in this situation. So even though I do praise this last quarter, I'd like to see at least a few more positive reports like this one to convince me that Topps is worthy of attention. I'd also have to see, at the very least, a higher dividend yield and the prospect that the dividend could be increased -- the quarterly payment of $0.04 per share has been around for quite some time. For now, I would have no interest in investing in Topps.

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Fool contributor Steven Mallas owns none of the companies mentioned. He is a big fan of Topps' Wacky Packages. As of this writing, he was ranked 3,011 out of 18,736 investors in Motley Fool CAPS. Don't know what CAPS is? Check it out. The Fool has a disclosure policy.