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A Stock You Must Play With

The classic toymaker is becoming a Peter Lynch stalwart


Mattel MATToy companies are not what they used to be. They used to be these places where plastic and metal got thrown together to produce trifles. Not anymore! Good toymaking is both an art and a science, combined with intensive market research, and tied-in with brands and franchises that worth billions.

I think of toys the same way I think of energy — the world always will need them, and that need always will be filled by companies like Mattel (NASDAQ:MAT)

The company makes toys across all of these famous brand names: Barbie, Polly Pocket, Little Mommy, Disney Classics, Monster High, Hot Wheels, Matchbox, Tyco R/C, CARS, Radica, Toy Story, WWE Wrestling, and Batman; Fisher-Price brands comprising Fisher-Price, Little People, BabyGear, View-Master, Dora the Explorer, Go Diego Go!, Thomas and Friends, Sing-a-ma-jigs, See ‘N Say, and Power Wheels and the American Girl Brand.

And despite that crowded stable, Mattel still can’t afford to rest on its laurels. The company constantly must fight rival Hasbro (NASDAQ:HAS) to win licensing rights to the hottest trends. With video games and social media games now serving as additional competition, Mattel also finds itself entering that world as well.

Mattel can’t think of itself as just a toymaker anymore.

The bad news is profits at Mattel were down 53% this past quarter, partially because of an acquisition of HIT Entertainment and slower sales in two of its biggest names, Barbie and Hot Wheels.

The good news is Mattel is in fantastic shape to refine and grow its business. The company has about $1.4 billion in cash offset by the same amount of debt. The thing that really keeps its choo-choo trains running is cash flow. FY2011 generated $475 million worth, after $390 million in FY 2010. The company is on such solid footing that it pays out much of that cash flow as a 4% dividend.

Mattel is settling in as what Peter Lynch would call a stalwart. It’s growing at a nice, modest 10% annually. It has a well-established business and brand with reliable cash flow, strong yield and a market that is constant — kids. I trust in management to execute on its classic core business.

The key going forward will be successfully migrating into these new areas of entertainment, and given the company’s success thus far in its history, I consider that to be more likely than not. At 13 times this year’s earnings, MAT shares are a tad pricey, but given the dividend, I’d make it a buy.

As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.

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