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Wall Street JournalJAKKS Pacific, Inc. (NASDAQ:JAKK) Looks Inexpensive After Falling 28% But Perhaps Not Attractive Enough
Unfortunately for some shareholders, the JAKKS Pacific, Inc. (NASDAQ:JAKK) share price has dived 28% in the last thirty days, prolonging recent pain. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 19% in that time.
Although its price has dipped substantially, JAKKS Pacific's price-to-earnings (or "P/E") ratio of 5.9x might still make it look like a strong buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 16x and even P/E's above 29x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
JAKKS Pacific could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.
Check out our latest analysis for JAKKS Pacific
Is There Any Growth For JAKKS Pacific?
The only time you'd be truly comfortable seeing a P/E as depressed as JAKKS Pacific's is when the company's growth is on track to lag the market decidedly.
Retrospectively, the last year delivered a frustrating 12% decrease to the company's bottom line. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
Looking ahead now, EPS is anticipated to slump, contracting by 14% during the coming year according to the dual analysts following the company. That's not great when the rest of the market is expected to grow by 14%.
In light of this, it's understandable that JAKKS Pacific's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.
What We Can Learn From JAKKS Pacific's P/E?
JAKKS Pacific's P/E looks about as weak as its stock price lately. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
As we suspected, our examination of JAKKS Pacific's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.
Plus, you should also learn about this 1 warning sign we've spotted with JAKKS Pacific .
If these risks are making you reconsider your opinion on JAKKS Pacific, explore our interactive list of high quality stocks to get an idea of what else is out there.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.