JAKKS Pacific; Callaway Golf Comeback Could Be in the Works

NEW YORK ( TheStreet) Many earnings-season issues worry me. One is the constant focus on beating consensus estimates for a three-month period of operations, translating into very short-term thinking for companies and investors. The other side of that coin is: When investors overreact to short-term noise it creates market inefficiencies, which sometimes provide buying opportunities.

One of the things I like about earnings season is seeing reporting results from challenged companies, giving the notion of a possible turnaround. Now, one quarter does not a turnaround make, but it might just be a start.

Late last week, interesting earnings releases from troubled toy company, JAKKS Pacific ( JAKK), and long-suffering, high-end golf club maker Callaway Golf ( ELY) were released. JAKKS, which fell from $19 to $4.50 within the past 18 months, had been putting up some terrible numbers the past few quarters -- including a 27% slide in revenue and a $47 million loss in the second quarter of 2013.

Consensus estimates were calling for earnings of five cents for the quarter; JAKKS lost $2.14 per share. Between July and October, shares fell 61%. Even I, bottom-fishing dumpster-diver I am, was not comfortable taking a position in JAKKS, which was then trading in the $7 range.

Last Wednesday's third-quarter surprise sent shares back to the $7 range. For the quarter, revenue fell 1% to $311 million which was above the $298 million consensus. The company earned $36.6 million, or $1.11 per share, six cents better than consensus estimates.

JAKKS attributed the better-than-expected quarter to strong sales of Disney Princess dolls, and cost-cutting measures, one being the 10% cutting of its workforce in July. While there was some good in this report, it's not enough to entice me to take a position. The company still has a long road back to full-year profitability, and the balance sheet, while not bad, is no longer as attractive. Over the past year, cash has fallen from $140.8 million to $51.5 million, while total debt has fallen from $148 million to $138 million.

JAKK Chart JAKK data by YCharts

Meanwhile, Callaway Golf -- which I owned for several years and finally gave up on -- also reported better-than-expected results, which sent shares up 20% on Friday to a 2 1/2-year high. Third quarter revenue of $178 million was well ahead of the $153 million consensus estimate, while the 18-cent loss better than the expected 31-cent loss.

Late yesterday, Callaway announced redemption of its remaining convertible preferred stock, issued back in 2009, while facing significant liquidity challenges. This was a very controversial move at the time and an expensive form of financing. The buyback may signal the end of a difficult chapter in the company's history. ELY Chart ELY data by YCharts

Whether Callaway is finally turning the corner remains to be seen, as the company has not turned an annual profit since2008.

I was an "early adopter" back in 2009, believing that a turnaround was just a year, or perhaps two, away. Even my patience ran out, as that turnaround was pushed farther and farther into the future. Now, it does appear that the future is looking brighter for Callaway, but I'm still staying on the sidelines, at least for now.

At the time of publication, Heller held no positions in either of these companies.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.