Topps TOPP
May 11, 2001 - 2:58am EST by
2001 2002
Price: 10.19 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 0 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT

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Investment idea: The TOPPS Company, Inc.

The TOPPS Co., Inc. is a NY based international marketer of entertainment Products, mainly collectible trading cards, confections and sticker/album collections. Founded in 1938, Topps branched into Bazooka bubblegum in 1947 and marketed its first baseball cards in 1951. Topps offices are located in Canada, the UK, Ireland, Italy, Brazil, Argentina and the USA, with a total staff of 420 people worldwide. FY ’00 revenue was almost $375m. For more info, go to


The stock is relatively recession proof, as illustrated by the strong performance back in 1991-2. This is important, given the weak economic data worldwide, especially in the USA, where manufacturing is even felt by some to be sinking into a depression.

A total of 170 institutions own almost 60% of the 44.6m shares outstanding. This assures liquidity and implies a “blue chip” status (legitimacy).

Topps currently sits on $3.50/share in cash and this is expected to grow to nearly $4 by the end of FY01.

Rev. grew by an average of nearly 33% in the last 5 years, while net margin was over 25% last year as compared to Industry average of 5.2%. Trailing P/E is now at 7.7 (price =$10.13), while my estimated forward P/E is 15.6, based on a FY01 EPS of 65 cents. Comparables trade at 25-30 multiples, but this may be too high. BV/share is $4.20, so MV/BV is roughly 2.4, high, but not too high. Note that analyst consensus for FY’01 is 93 cents, with the range going from 89 cents to $1. This means that I am being very conservative with my estimates. Instead of $41m in earnings, I am anticipating only $29m in earnings and $265m in revenue (very conservative)! DCF valuation using $30m FCF, 125 growth for 10 years and 16% discount factor gives a price of approx. $14. Add to this $3.50 in cash, we get a target price of $17.50.

Unique characteristics:

Topps is operationally leveraged and increasing sales bring big rewards in terms of earnings. Conversely, declining sales in the core candy business will cause disappointing earnings results. Offsetting this is the fact that Topps has zero debt and this reduces business risk overall. The stock has low analyst coverage.

This company has been in the process of transforming itself from a predominantly sports card company to a candy company. I would characterize Topps as a late growth/early mature stage company. There will be lower revenues in FY01, as the Pokemon craze dies out. The legacy of this is that that product has left a pile of cash and no debt. Topps has also not paid a dividend for several years.

Candy is a reliable growth business for Topps, while the outlook for the card business is flat for the medium term with possibility of hit products like Pokemon likely every 5 years or so. Debt free, the card business should be able to command a multiple of 10 on its own, while candy can financially justify a multiple in the range of 15-20 (based on a projected 10-15% annual revenue growth rate and healthy margins). Topps candy brands are favourites among kids. Valuation based on a “reasonable” PE of 15 and $4 in cash is $13.75. The occasional hits from the card side could add another $1 of market value. Topps is currently at $9.69 (Monday, April 2, 2001).

Finally, as Topps only has about 10% management/insider ownership, this could be seen as a potential detriment to good corporate governance.


The company presently is involved with 2 lawsuits, one notably is in California and deals with anti-gambling issues arising from the use of randomly included insert cards. Topps alleges that though an unfavourable ruling could have an adverse effect on future performance, they are confident of the defenses prepared.

The faster than expected loss of vitality of the Pokemon franchise is noted as a risk factor, but I have totally discounted future earnings from this in my valuation model.

The failure of the Internet push, which is presently costing a few million dollars, could adversely affect revenue growth from 2002 onwards. E-Topps has already been delayed a few months until summer, however, in the grand scheme of things the initiative seems to be progressing well.

A recession in 2001 to 2003 looks likely. All the signs are pointing to a slowdown and the excesses of the past 3-5 years will have to be undone. In this type of environment, many companies, including Topps can be adversely affected, both in terms of real business and also in terms of a market supporting lower multiples on stocks.

Finally, Topps has been an inconsistent performer over the last 10 years.


Topps could benefit from a higher valuation if management decides to sell. The company being so cash rich, debt free, with valuable brands and good geographic diversification would make a comely target.

Internet initiatives are expected to spur growth in the slower growing sports card side of the business. Below $11, I feel that Topps is a good buy that holds the potential for up to 30%+ gain this year on its own, and a bit more if the subject of an acquisition.


1) Topps hits the radar screen of a suitable takeover candidate, especially since the tentative decision on business combinations and intangible assets was taken in February. It seems that with the amortization of goodwill being a thing of the past, merger fever is set to be re-ignited. Go to

2) Given that Topps no longer pays dividends and that management has repaid all the debt, it is likely that the next project will be an aggressive buy back of stock. This will raise EPS for the remaining shareholders.
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