Toymaker JAKKS Pacific (Nasdaq: JAKK) will report first-quarter 2008 financial results Wednesday. Let's see if its Eye-Clops is on the ball.

What analysts say:

  • Buy, sell, or waffle? With nine analysts covering JAKKS (yeah, we think they just want to play with the toys, too), four say buy and five say hold.
  • Revenues. Sales are expected to rise 10.8% to $137.5 million, which is in line with the estimates they have for the toymaker over the next five years as well.
  • Earnings. JAKKS has a knack for beating analyst predictions for earnings, and handily too, but that could partly explain why they forecast profits to grow more than 58% in the quarter.

What management says:
With Mattel (NYSE: MAT) and Hasbro (NYSE: HAS) both reporting earnings this morning and giving the markets mixed signals on what to expect from other toymakers as a result, it probably pays to look at what worked and what didn't for the big two and see how that translates into what JAKKS is offering.

Hasbro had a very good quarter and saw its Transformers toys continue to perform well, while Mattel disappointed with a surprising loss as Barbie maintained flat sales, Fisher-Price sales plunged. Luckily, the success of High School Musical showed some strength for the company.

I think the trend we're seeing suggests that the movie tie-ins are a big theme for driving toy sales related to them. This should bode well for JAKKS, which has been enjoying the incredible popularity of Hannah Montana and Miley Cyrus. With management noting that Wal-Mart (NYSE: WMT) is desirous of becoming a Hannah Montana destination spot, I'd expect we'll see this franchise supporting much of JAKKS revenues this first quarter, typically its weakest. Add in its own line of High School Musical toys, and JAKKS may surprise again.

What management does:
While the lawsuit with World Wrestling Entertainment (NYSE: WWE) has been settled and its license will enter a new arena with Mattel in 2009, JAKKS gets to keep selling WWE toys until 2010 -- which it plans to do -- but there will still be some legacy costs from the litigation which may spill over into the quarter that will dampen margins. The wrestling franchise will remain a big player for JAKKS, although whether the smaller TNA brand it has picked up to replace WWE can fill out the spandex remains to be seen.

Margin

12/06

03/07

06/07

09/07

12/07

Gross

38.5%

37.9%

37.1%

37.4%

37.8%

Operating

12.1%

11.9%

11.5%

12.1%

12.5%

Net

9.5%

9.4%

9.1%

9.7%

10.4%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
At just 9.3 times 2009 earnings, JAKKS is very cheap. Even with its shares off more than 8% in trading so far today, Mattel is still valued at more than 11 times forward earnings, while Hasbro pushes almost 16 times. As the two biggest players in the space, it's natural they would be given a premium to play, but two other troubled toymakers -- RC2 (Nasdaq: RCRC) and LeapFrog Enterprises (NYSE: LF) -- show just how discounted JAKKS stock is on a relative basis.

RC2 hasn't yet recovered from its recall mess last year, and costs weighed it down at Christmas. It will be reporting earnings this week as well, so we'll see whether the turnaround is beginning to take hold. Selling at just under 9 times next year's earnings, JAKKS is being seen in the same light even though its prospects look better. Similarly, LeapFrog is valued at 19 times earnings even though it's still reporting losses, albeit narrower ones.

I'm expecting to see JAKKS jack the street once again and think its stock is undervalued at these levels. If it realized only modest P/E expansion to say that of Mattel, its shares would be valued at around $34 a stub. And over longer time frames, I see this toy maven enjoying bigger growth opportunities.

Related Foolishness:

RC2 is a recommendation of Motley Fool Hidden Gems. You can hitch a ride with the service that's beating the market by 30 percentage pointing by hailing a 30-day risk free trial subscription. Hasbro is a Stock Advisor pick, while Wal-Mart was recommended by Inside Value.

Fool contributor Rich Duprey owns shares of Wal-Mart but does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.