UPDATE 1-Needham sees turnaround at RC2 in 2009; shares rise
(Recasts; adds analyst's comments, background, share movement)
Nov 4 (Reuters) - Needham & Co upgraded RC2 Corp RCRC.O to "buy" from "hold," and said the U.S. toy company's results will show a sharp rebound in 2009, partly helped by better sales of several products, lower transportation as well as raw material costs, sending its shares up as much as 16 percent.
On Monday, RC2 posted a lower-than-expected third-quarter profit, hurt by a decline in product sales amid a sluggish retail market, and cut its 2008 earnings outlook for the second time this year. [ID:nBNG293]
But Needham analyst Sean McGowan believes there are several factors that lead him to expect significantly better results in 2009.
McGowan said the company, which has been hurt by recalls of lead-tainted products, should see a rebound in sales of its Thomas & Friends line of toys from last year's recall-stalled levels.
McGowan also sees sales from the First Years, Super Why!, and The Fast and the Furious line to improve.
Lower prices of raw materials like zinc and resin should help margins. Zinc prices are down 50 percent in the last year, while resin prices should also follow the sharp decline in crude oil products, McGowan said.
RC2 negotiated a reduction in royalty rates on die-cast Thomas products, with the reduction taking effect in mid-2008. McGowan believes a full year of lower royalties should help the company.
The analyst has a price target of $25 on RC2's stock.
Shares of the Oak Brook, Illinois-based company were up $1.48 at $13.51 in morning trade Tuesday on Nasdaq. They touched a high of $13.90 earlier. (Reporting by Dilipp S Nag in Bangalore; Editing by Pratish Narayanan)
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