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Mattel (NASDAQ:MAT) is a toy company that was launched in Southern California more than half a century ago and is home to some of the most memorable toy brands. If you ever played with a Barbie doll or a Hot Wheels car, you were playing with a Mattel toy. A merger with Fisher-Price in 1993 gave Mattel a strong foothold in infant and preschool toys.

It feels like everyone I know seems to be having a baby these days and almost all of them either already have the Fisher-Price Ocean Wonders Aquarium Swing or have it on their baby shower list. It is this new baby boom that I discussed while featuring Procter & Gamble (NYSE:PG), along with the release of a new Fisher-Price toy called T.M.X. Elmo that got me interested in Mattel. The T.M.X stands for "Tickle-Me-Extreme" and the X also represents the 10th year anniversary of the hugely popular Tickle Me Elmo, which was launched in 1996 and became the "must have" toy of that holiday season.

The mystery shrouded launch of the T.M.X. Elmo seems to have had the desired effect and according to Toys R Us the toy flew off shelves soon after its September 19th debut. This $40 toy currently sells for as much as $145 on Amazon.com the last time I checked and it is quite possible that it will become the "must have" toy of this holiday season.

A best selling product can do wonders for a small company and sometimes even manages to have a profound impact on the sales of large companies that have multiple product lines. Just think of what the iPod did for Apple (NASDAQ:AAPL) or the Razr cell phone did for Motorola (MOT). However the success of Mattel does not depend on just the T.M.X. Elmo. Six out of the top 15 toys in the Toys R Us "Fabulous 15" list of hot new toys for the 2006 holiday season are Mattel or Fisher-Price toys.

A good company or a great product does not necessarily translate into a great investment. So let's take a look under the hood of this company (it does make the Hot Wheels line of toy cars) and see what the numbers tell us. At its current Price/Earnings ratio of 13.76, Mattel is attractively priced when compared to the S&P 500 or the toy industry's average P/E of 24.29. I am also comfortable paying 1.42 times 2005 sales, given the company generates almost half a billion dollars in free cash flow each year thanks to one of the best operating margins in this industry of 12.75%. While the total assets on the balance sheet are almost twice the total liabilities, there are a few things to watch out for. Mattel has almost a billion dollars ($928.39 million to be precise) of debt on its balance sheet, over half a billion dollars in inventory and $728 million in Goodwill. Thankfully it also has $625 million in cash and some of the inventory is most likely a build up for the holiday season.

The stock does seem to have gotten a little ahead of itself with a 24% gain in less than 3 months, but I doubt it is going to pull back a whole lot from these levels given the positive sales outlook for the T.M.X. Elmo. I plan to purchase Mattel for my personal portfolio after this newsletter is sent to subscribers. With its dividend yield of 2.5%, Mattel could prove to be a good replacement for Marcus (NYSE:MCS), which I sold last week on valuation concerns.

Competitors:

The toy industry is highly competitive and is often driven by one hit wonders. Mattel faces competition from LeapFrog (NYSE:LF), JAKK Pacific (NASDAQ:JAKK), Hasbro (NASDAQ:HAS), the owner of the Playskool and My Little Pony brands and RC2 Corporation (NASDAQ:RCRC), which owns the Learning Curve and Lamaze brands. Mattel also faces competition from Nintendo with its November 19th launch of the Nintendo Wii gaming console. The Wii also made the Toys R Us "Fabulous 15" list of hot new toys.

The Good:

  • Mattel with its diverse product line, which includes Barbie dolls and Hot Wheels cars, is the number 1 toy maker in the United States.
  • The Fisher-Price division of Mattel should benefit from the "new baby boom".
  • Mattel recently launched the T.M.X. Elmo toy amid a shroud of secrecy and the toy is flying off store shelves.
  • The company has excellent operating margins and generates almost half a billion dollars in free cash flow each year.
  • Mattel's dividend yield of 2.5% is well above the average yield of the S&P 500.
  • Mattel sports an attractive valuation with a current P/E of 13.76 and a P/S of 1.42.
  • The stock is showing strong upward momentum in recent months.

  • The Bad:

  • The stock has already gained 24% in less than three months.
  • Mattel carries close to a billion dollars of debt on its balance sheet.
  • The toy business is highly competitive and usually the "must have" toy of the year tends to come out of the blue.
  • The pricey Playstation 3 console and the more reasonably priced Nintendo Wii gaming console will be launched this holiday season.

  • The Numbers:

  • P/S 1.42
  • P/E 13.76
  • Long Term Debt $795 million
  • Cash $625.05 million
  • MAT 1-yr Chart



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    Source: Mattel: A Game Worth Playing