Mattel: Watch Elmo Laugh All The Way To The Bank

Oct.17.06 | About: Mattel, Inc. (MAT)

Mattel Inc.'s (NASDAQ:MAT) third-quarter results, announced on Monday morning, contained a pleasant surprise, with the company's earnings of 62 cents a share ahead of the consensus estimate of 61 cents. Headlines concentrated on the launch of T.M.X. Elmo but the doll's sales are insufficient as an explanation for the strength.

There are several reasons for this assertion. Perhaps most compelling is the simple observation that the latest incarnation of the ticklish red monster has been out less than a month, with only two weeks of that in the reported quarter. The doll was launched on Sept. 19. Of Mattel's division, Fisher-Price brands was the earnings champion in the quarter, growing 9 percent in the period. But if Elmo is responsible for that growth, then the rest of the brand languished for two-and-a-half months. That doesn't seem to be the case.

We don't know how much faith we put in Internet rumors that Mattel was taken by surprise by the manufacturing costs of T.M.X. Elmo. It seems like the kind of thing that a large company would have a pretty good handle on, and most of the sources that we've come up with for the assertion contain links to eBay auctions. But certainly Mattel does seem to be unable to meet demand for the toy, and it's not unreasonable to believe that this is a relatively low margin toy due to the shocking amount of engineering involved.

A search on eBay shows a bunch of T.M.X. Elmos, generally selling for double the suggested retail price of $40. Parenthetically, there are two versions; if you're interested in speculating in collector's items, know which one you're buying. For those of us more interested in stock investing, we can broadly say that demand seems to be outstripping supply.

Right now, the eBay trade doesn't benefit Mattel, but we can imagine that there are two buyers for the toy right now: speculators, who likely know the difference between the boxes, and those willing to pay a premium to have the thing now for some reason - a child's birthday, curiosity, holiday shopping before eBay prices get really crazy.

Elmo didn't drive third quarter earnings for Mattel, but he probably will for the fourth quarter. How attractive this stock is right now is likely related to the ratio of speculators to early adopters on eBay.

At the time of publication, Paul DeMartino did not directly own puts or calls or shares of any company mentioned in this article. He may be an owner, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund.

Note: This is independent investment and analysis from the investment channel, and is not connected with Reuters News. The opinions and views expressed herein are those of the author and are not endorsed by

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