Investors in entertainment licensor 4Kids Entertainment (NYSE:KDE) took quite a beating last week, with the stock plummeting by as much as 10% in the wake of a disappointing first-quarter earnings report.
As the Yu-Gi-Oh! and Pokemon fads, on which it built its recent fortunes, continue to wane, 4Kids noted that its revenues have waned in tandem. Rising sales of the companies' backup franchises, such as Teenage Mutant Ninja Turtles and Cabbage Patch Kids, haven't sufficed to offset the marquee names' declining fortunes. As a result, revenues for the first quarter declined 10% in comparison with the year-ago period. Meanwhile, the costs of operations rose ever so slightly, and a combination of the two trends left 4Kids with 36% less in profits per diluted share -- $0.14.
None of this, it seems, came as a major surprise to 4Kids, which is already taking steps to shore up its future. The company's rebranding its Saturday morning timeslots on Fox (NYSE:FOX) as "4Kids TV." It's cementing a deal with Motley Fool Stock Advisor recommendation Hasbro (NYSE:HAS) to turn that company's G.I. Joe line into a new animated series. It's planning to complement its current Winx Club offerings with additional programming targeted toward the pigtail set. And it's attempting to freshen up the Yu-Gi-Oh! brand with a new television series based on the original, titled Yu-Gi-Oh! GX.
At first glance, it may seem like a shotgun approach, and 4Kids may look like a company just randomly casting about in hopes of finding a winner. The "shorting" community certainly remains unimpressed and had 17% of 4Kids' stock sold short at last count. But I'm not at all convinced that the shorts are calling this one right.
Sure, there's no denying that the near-term outlook is cloudy and 4Kids' earnings are "lumpy." While 4Kids has earned a little better than $0.22 a quarter on average over the past 10 quarters, seven of those quarters saw earnings below that average. Over the past seven years, average annual income has been $1.22 a year. But only two of those years were above $1.22.
Yet even so, what we have here is a company that, over an extended period of time, has earned an average of $1.22, and that's selling for just 16 times that number -- while carrying half of its market value in cash. As bad a picture as the recent earnings report paints, 4Kids has demonstrated long-term staying power and seems unlikely to depart the markets any time soon. Meanwhile, its $130 million cash hoard should enable it to wait out the storm until it finds the next big winner.
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Fool contributor Rich Smith owns shares of Hasbro but has no position in 4Kids Entertainment or Fox. The Motley Fool has a disclosure policy.
