Playmates are hot. No, I am not talking about those girls from the Playboy magazines. Get your mind out of the gutter. I am referring to Playmates Toys (869 HK).
869 HK is developer of toys. It does the creation, the marketing, the distribution etc, of toys. Think of it like a Mattel or a Hasbro. On a smaller scale and without the household names such as Barbie and Hotwheels. It however, partners with brand owners to help monetize their brands through toys - e.g. Family guy, Michael Jackson, etc.
Now why is it hot...
869 HK actually looks terrible on 1st inspection. It was loss making in 2008. Again in 2009. And again and again until 2012, when it finally turn profitable.
And with that turn, it turned into a multi-bagger. A 5x return on your $ to be precise. That's hot.
The turnaround in 2012 came from the launch of the TMNT toys which they develop, market and distribute. TMNT is essentially Teenage Mutant Ninja Turtles. Heroes in a hard shell!
I love TMNT as a kid. And after a revamp in 2012, TMNT is apparently popular with kids in this generation too. And from what I can find online, that still remains the case in 2013. Thanks to the successful relaunch of TMNT, the related toys saw huge demand. TMNT toys were the #1 selling action figure in 2012. And it appears that it is still the case in 2013 if you go by some top 10 lists of things kids want for Christmas.
The heroes in the hard shells cannot be under estimated and the same can be said of the profits that 869 HK is making off the cartoon franchise. It is quite clear that 2013 profits for the company will be significantly higher than 2012. And the company has already issued a positive profit alert to that extent.
Looking ahead...
Going forward, if 869 HK can distribute the products to more territories beyond the core US and Europe markets and to the extent it can create more line extensions and products around the TMNT franchise, it can potentially grow profits further. If pricing can be increased, all the better, though it is not clear if it is possible in a very competitive toy retailing market.
It's main market is the US in which it derives 60% of its total sales. And if you are a believer of the US recovery, this company will surely benefit from increased consumer spending.
Oh and did I mention that the TMNT movie will be out in Aug 2014 and directed by the same director of Transformer. And guess who's starring - Megan Fox! Who knows what that will do for the toy sales.
The company is in a net cash position and require very little incremental capital to grow. So potentially, we could see the company issue a dividend for the year ending 2013.
Now hold your horses turtles...
Now, this is all very exciting. But a few questions remains:
1) What happens when TMNT starts to lose favour with the kids? As it is, the company is booming because of TMNT. Its other products are not all that great. So there is a single-product risk here.
2) Given the popularity of TMNT and the fact that the content belongs to the content company (Nickelodeon in this case), will we see them ask for higher royalties and which could potentially mean lower profits for 869 HK?
3) Structurally, do kids still like toys? Are toys getting substituted by iPads and the like? Interactive games is all the rage, from what I see. Can traditional toys, which 869 HK produce, still be in demand? Can 869 HK revamp itself to cater to the interactive market?
4) What is the right price to pay for this? The company has no meaningful historical valuations as reference since it has been loss-making for the longest time. Its peers like Hasbro and Mattel are trading at P/E ratios +/- 20x. But are those data points relevant? After all, they are much larger players with their own library of brands.
Conclusion...
Clearly, there are many things to be excited about and many more to worry about. I think it is generally hard to get this right. But it is still a very interesting company nonetheless.
Let me know what you think. Speak to me here.
P.S. This article was written 2 weeks ago. Recent developments and price action has proven how difficult it is to make $ on this stock. Difficulty = insane. But at some price, it will provide a sufficiently attractive margin of error, IMO.
P.S. This article was written 2 weeks ago. Recent developments and price action has proven how difficult it is to make $ on this stock. Difficulty = insane. But at some price, it will provide a sufficiently attractive margin of error, IMO.
Disclaimer: the analysis is overly simplified. Please do your own research before reaching a decision. Caveat emptor
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