It isn't always fun and games for JAKKS Pacific (NASDAQ:JAKK) and its shareholders. The maker of art activities, action figures, and joysticks loaded with video games -- among other stuff -- reported earnings last week that didn't inspire much playtime for the crusty old investors on Wall Street.

For the second quarter, net sales declined 2.4% to $124 million. Operating income decreased 38.7% to $9 million. Net income declined 45.4%, coming in at $6.4 million, or $0.22 per diluted share. JAKKS Pacific did see its gross profit on a dollar basis go up a bit, increasing 2.5% to $49.3 million. The gross profit margin also rose from 37.8% in last year's quarter to 39.7% in this year's quarter. Increases in selling, general, and administrative costs and depreciation and amortization, however, contributed to declines in the operating numbers.

Sales in JAKKS Pacific's TV Games section were singled out as adding to the shortfall. The same was said for its Fly Wheels line. The company is also dealing with charges relating to its acquisition of Creative Designs International, which offers dress-up items and other products for girls.

Like the movie business, the toy industry can be hit or miss, but you'll find that JAKKS Pacific has a pretty cool portfolio if you check it out. Here are a few examples. First, JAKKS has a licensing relationship with Pokemon (yeah, I know, Pokemon isn't the fad that it once was, but it's still out there, my friends). Second, there's a joint venture with THQ (NASDAQ:THQI) to publish games based on World Wrestling Entertainment (NYSE:WWE) properties. (There is, however, some litigation risk surrounding this part of the portfolio, which is discussed in the company's 10-K filing.) And third -- although this might make many parents out there groan -- the company is even doing business with the dreaded purple creature from PBS known as Barney. Hey, Barney can make money, so keep that in mind.

Here's something else about JAKKS Pacific -- it might be worth further investigation. The company lowered its guidance for the full year to $2.32 per share. The stock closed on Friday at $16.32. At $2.32 per share, the full-year P/E ratio becomes 7. Analysts believe that the company might be able to grow a little more than 11% for the next five years.

Let's be conservative and say the company grows at 9% for the next five years. The PEG ratio therefore becomes 0.77. That suggests possible undervaluation. For those who need to see some free-cash generation when checking for a value -- which would include just about everyone -- let's view the data from the latest 10-K. The company has seen net cash from operations for 2003, 2004, and 2005 equal to $7.4 million, $131.4 million, and $71.1 million, respectively. The capital expenditures for those same respective years were roughly $5 million, $6 million, and $8 million. So JAKKS Pacific does generate free cash. Even after accounting for acquisitions, the company has generated plentiful free cash flow in the past two years.

Assuming that JAKKS Pacific can properly mange its portfolio going forward -- adequately predicting and exploiting trends -- then the stock might have some upside from here. Do not, however, underestimate the competitive forces of giants like Hasbro (NYSE:HAS) and Mattel (NYSE:MAT). As always, Fools should exercise their own judgment and perform more due diligence before buying.

Some past Foolishness on JAKKS Pacific:

Hasbro is a Motley Fool Stock Advisor pick, while Mattel is a recommendation of the Motley Fool Inside Value newsletter. Take the newsletter that best fits your investing style for a 30-day free spin.

Fool contributor Steven Mallas owns none of the companies mentioned. The Fool has a disclosure policy.