JP Morgan raised the target price and gave an overweight rating! What exactly does Funko do?

Funko Inc is an American company, which mainly produces licensed limited popular culture collections. JP Morgan upgraded FNKO’s rating to overweight, and raised the target price to USD 28 by December 2022.

Like most manufacturers, with the sharp increase of freight and product cost in the second half of 2021, FNKO will begin to deal with these unfavorable factors in the third quarter, and the lagging effect of price increase will also bring a positive impact on 2Q's profit margin. In addition, FNKO expects the SG&A pressure of 2Q to be about 200 basis points, reflecting the one-time project expenditure of DC relocation and ERP system implementation, which will not continue in 2H and will be reversed next year.

JP Morgan believes that FNKO has the opportunity to continue to adjust the cost structure of SG&A. On the whole, EBITDA's profit margin reached its peak in 2Q, and it is expected to increase in 2H and 2023.

Compared with other non-essential items, toys have always shown flexibility in the economic downturn. According to Euromonitor, the industry increased by 7% in 2008 and decreased by 4% in 2009, while PCE's games, toys and hobbies category increased by 4% in 2008 and remained flat in 2009. JP Morgan expects to perform relatively well during the economic downturn, because parents have always been reluctant to cut spending on toys during the economic downturn, partly because of the low average price point/product durability, and given the nature of this category of events, the risk of demand pull is low.

JP Morgan believes that FNKO is well positioned in view of its price point of less than $12 and impulsiveness of purchase. In fact, despite the price increase, FNKO's sales are still growing, and Isaac Larian (CEO of MGA Entertainment Company) also spoke to us recently. He predicted that goods with a price of less than $25 would sell well during the economic recession.

According to JP Morgan's estimate for 2023, FNKO's P/E ratio is about 10 times, and EV/EBITDA is about 5.5 times. In comparison, the average P/E ratios of large toy peers are 15 times and 8 times, respectively, although FNKO's revenue growth is expected to be higher. The PT of USD 28 on December 2022 is based on the estimated price-earnings ratio of 13 times and about 7.5 times EV/EBITDA in fiscal year 2023, which is still conservatively lower than its peers, but in line with its historical valuation based on EV/EBITDA. Before the epidemic, the average price-earnings ratio of FNKO was about 18 times, about double that of SPX. JP Morgan's forecast for 2023 is 18 times, which indicates that the price will rise to over 30.

JP Morgan believes that TCG-led investment (about 25% of the shares in USD 21) eliminates a threat to the stock, because ACON has been seeking to liquidate its shares for quite a long time in view of the IPO at the end of 2017.