Description

As the name suggests, Playmates Toys makes toys - specifically, action figures.  The Company was written up in early 2021 by JLHR who I thank deeply for introducing me to the name. 

Playmates has historically derived virtually the entirety of its business from the sale of Teenage Mutant Ninja Turtles (TMNT) action figures (for which they have always had the exclusive license).  Historically, this meant that Playmates would boom and bust with the turtles - when there was a successful TV show or a new movie Playmates would generate substantial profits; when the franchise was quiet, the Company would bleed cash. 

Since the last turtles boom (coinciding with the 2014 Michael Bay film and 2012 Nickelodeon TV Series), however, the Company has diversified and begun receiving licenses for some 2nd and 3rd tier franchises (e.g. Godzilla vs. Kong, Miraculous: Tales of Ladybug and Cat Noir, and Startrek).  This has permitted the Company to be marginally profitable even without any revenue from the TMNT.  Of late, the Company has generally been producing ~HK$30-40m (~US$5m) of pre-tax profit (excluding non-op gains and losses on their cash and investments).  At ~25-30x earnings the Company is not cheap but:

• It has ~90-95% of its market cap in net cash
• The TMNT franchise is back and will begin contributing in 2H '23

The Cash:

While I derive comfort from the cash, it serves a business purpose and is unlikely to be returned to shareholders.  Playmates has ambitions to get access to another Tier 1 franchise (Star Wars, Marvel, etc.).  These franchises rarely come up for bid and selection is based on two factors - first, can you make appealing products that sell well and burnish the IP and, second, do you have the financial wherewithall to see the deal through.  Regarding the first, Playmates believes (as do I) that their product quality competes with (or exceeds) the likes of Hasbro and Mattel.  The problem that Playmates has historically run into is that licensing deals are typically done for 10-year terms with minimum payments along with revenue-based royalties; annual minimums can run ~US$10m/year.  As a result, Playmates had trouble being viewed as a real alterantive when they had $20m of cash and a boom/bust business - their ability to meet the minimum payments was highly uncertain.  That changed during the last TMNT boom when the Company retained ~50% of its earnings over 4-5 years and built up a ~US$125m balance.

That is, the cash balance is there to help Playmates win future business as it has helped them win the non-TMNT business they've earned to date.  I have been told by the Company, repeatedly, that they are (i) not going to draw this cash down unless operating losses require it and (ii) that they do not intend to grow it in any material way; they have stated an intention to dividend out future earnings.

The TMNT Franchise:

Yesterday a new TMNT movie (Mutant Mayhem) was released.  To date the movie has received very strong reviews - rated fresh by 95% of critics and 94% of audiences.  My personal take is that the movie is good - importantly, it is likely to appeal both to the generation of people who grew up with the franchise and their children.  In connection with the movie, Playmates recently released a new line of TMNT toys.  These toys have also received good reviews.

Just before the official release of the new film, Paramount (the current owner of TMNT) announced both a sequel and a 2 season TV show for Paramount+ to bridge the gap between the movies.  From the perspective of a Playmates shareholder it is disappointing that the show will be unique to the Paramount+ service; I am hopeful that it will be shown on Nickelodeon and/or that Paramount will be sold to a larger service with more reach (Netflix, HBO, Disney).

Valuation:

It's hard to peg what the right price is for this Company.  The earnings and durability from the TMNT sales and their ability to acquire the rights to another Tier 1 franchise are unknowable but are going to be determinative.

The last time the TMNT franchise boomed it had a movie that got a 21% from critics and 50% from audiences on Rotten Tomatoes.  Despite the low scores, the movie did $493m at the box office ($191m domestic, $302m international; against a ~$125m budget).  A 2016 sequel did $245m total.  The franchise also had a reasonably well received TV series that ran on Nickelodeon from 2012-2017.  On the back of that, the Company did the following for Net Income (USD):

• 2012: $5.6m
• 2013: $68.8m
• 2014: $63.3m
• 2015: $35.6m
• 2016: $14.2m
• 2017: $6.8m

While there are some reasons to be skeptical that the prior cycle's success will be replicated (the movie, while better, is not being as aggressively promoted; there is more content to compete with; the franchise may have lost some relevance over the past decade which included a failed TV reboot; putting the new series on Paramount+ is going to hurt viewership/reach), there's been a decade of inflation, total box office share for Mutant Mayhem is projected to be broadly similar to the 2014 film, early reviews for the movie and toys are quite positive, and Paramount clearly believes in the franchise & has found a presentation that people actually seem to enjoy (that the franchise has persisted for this long given how badly received every movie until Mutant Mayhem was is surprising).  Finally, unlike 2014, the Company has a stable of other products that already more than cover its fixed costs.

In sum, I expect the Company will do more than its market cap in earnings over the next 4 years which is the current timeline for this Turtle's cycle (2 movies and a 2-year TV show) and that the great majority of that will be paid out as dividends.  At the end of that exercise, shareholders will (I expect):

• Have received more than their initial investment back via dividends
• Have a cash balance that covers 90-95% of their investment
• Have a modestly profitable business based on 2nd/3rd tier franchises - I see no reason Playmates wouldn't continue to win new franchises of this sort
• Have an option on the continued or future success of the TMNT franchise
• Have an option on Playmates acquiring the rights to a Tier 1 franchise

In total, I think there is on the order of 200% upside in the name over the next several years through the market ascribing reasonable valuations to the various components above.

On the downside, I think it's hard to see too much risk of permanent capital loss here.  This is owner-operated and the bulk of the cash is in Western jurisdictions (where the sales occur).  The guy who runs it (son of the controling family patriarch) lives in California (where much of the creative operations are located) and has a Western sensibility.

Catalyst

Significant dividends beginning in 2024.