1 Stock You Can't Afford Not to Buy Right Now

On April 16, toymaker Mattel (NAS: MAT) reported first-quarter results, and to put it kindly, some of the numbers didn't look so good. As a result, the stock price dropped significantly. Factors investors have been pointing to include higher materials and labor costs, as well as a generally lower volume of toys being purchased by the big retailers as they tighten up their inventory a bit.

But a more thoughtful analysis suggests other factors are at work in Mattel's performance and the market's reaction -- factors that paint a more nuanced picture of where the company stands, where it's likely to be headed, and why the company might now be a value investor's dream.

My Hot Wheels are rather lukewarm
But before we talk about anything else, let's get the bad news out of the way. Here are the highlights -- or lowlights, as the case may be -- of the company's less-than-encouraging first-quarter results:

  • Worldwide net revenue was down 2% year over year.

  • North American gross revenue was down 9% YOY.

  • Net profits were down 53% YOY.

On news of the report, Mattel's share price immediately dropped from $34.11 to $31.87. By the end of the day on April 17, it had fallen even lower, to just $30.57. At the time of writing, it's currently bounced back to $32, for a net move -- so far -- of -6.2%. We know about the higher materials and labor costs, but what else is behind the company's poor performance and accompanying knee-jerk market reaction?

Wall Street and Santa Claus
This was the first quarter after the holidays, traditionally the slowest quarter for toy manufacturers. Wallets have been cleaned out, and many people are trying to marshal any remaining capital into the paying down of seasonally induced credit card debt. The middleman in this transaction, the retailers, are also trying to tighten their inventory management and ordered less as a result.

Also let's not forget that the U.S. is in the very first stages of an economic recovery. Maybe. With any luck. And GDP growth, somewhere in the neighborhood of 2% to 3%, may not exactly be China-style, but it's much better than this country has seen for years. In short: People are getting a little more confident in their ability to get out into the economy and spend, but very, very slowly.

Always look on the bright side of life
You wouldn't know it from Wall Street and the market, but there actually were some encouraging numbers to come out of Mattel's first-quarter report:

  • North American gross revenue may have been down 9% YOY, but international revenue was up 7%.

  • Fisher-Price sales were flat, and American Girl was up 4%.

  • And Mattel is clearly taking care of its shareholders. The company bought back 700,000 shares of its own stock in the first quarter and announced a second-quarter cash dividend of $0.31 per share, making for an annual dividend of $1.24 per share. That works out to a healthy 3.9% yield.

Looking at the competition, Mattel also looks solid on a very important metric. Gross margin tells you something about how efficient a company is at the manufacturing end of things, and about the kind of brand and pricing power it can muster. Mattel's trailing-12-month gross margin is 50.2%. Longtime rival Hasbro's (NAS: HAS) gross margin comes in at 48.4% TTM. Peer Jakks Pacific's (NAS: JAKK) gross margin is only 31.29%. Those couple of percentage points between Mattel and Hasbro, not to mention the spread between Mattel and Jakks, can make a real difference on the bottom line.

And while you always like to see a company with more cash than debt, with $1.37 billion in cash on hand and $1.56 billion in debt, Mattel's balance sheet is fairly healthy, considering the debt-laden state of so many companies today.

A value investor's dream
But in the end, what makes Mattel such a great value investor's dream is this: Most parents, even when the economic chips are down, will still make the effort to buy toys for their kids, even if it means going without for themselves. Sure, Mattel's first quarter might be a bit off, but wait until the third or fourth quarter comes around; business is going to pick back up.

Now is the right time to think about getting in on Mattel, while it's still on sale. Because, come later, the company very likely won't be. Toys will always be around, and Mattel has some of the planet's hottest brands. As such, it's a great long-term stock, but it's not the only one you can profitably and confidently hold on to for the long term. Learn about the stock The Motley Fool is calling its top pick for 2012 in this aptly named special free report: "The Motley Fool's Top Stock for 2012." Get it while the shares are hot.

At the time thisarticle was published Fool contributor John Grgurich has a son who would sell him down the river for this year's municipal-vehicle Matchbox collection, but neither own shares of any of the companies mentioned in this column. Follow John's dispatches from the bloody front lines of capitalism on Twitter, where he goes by @TMFGrgurich. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple, Hasbro, and Mattel, creating a bear put spread position in Mattel, and creating a bull call spread position in Apple. The Motley Fool has a positively gripping disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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