Tickers in this Article: MAT, HAS, DIS, VIA, NYSE:VIA.B
In recent years, toy firm Mattel (NYSE:MAT) has posted steady earnings growth for shareholders. Thanks to a successful toy licensing initiative with major film studios, sales growth has also perked up and investors are becoming more comfortable that Mattel can expand its toy operations consistently going forward. TUTORIAL: Understanding The P/E Ratio

Second Quarter Recap
Net sales improved a very healthy 14% to $1.2 billion. Positive currency fluctuations accounted for five percentage points of the growth but was still very respectable as international sales jumped 12% on an organic basis. U.S. sales advanced 7%. Mattel brand sales jumped 22% to account for just over 66% of the total top line. This was due in large part to a 41% increase in sales from the entertainment business and in particular sales of toys tied to Disney's (NYSE:DIS) "Cars 2" film. Mattel licenses "Cars 2" and other trademarks and characters from Disney, as well as brands related to Viacom's (NYSE:VIA) (NYSE:VIA.B) Nickelodeon franchise.

Fisher-Price brand sales increased 4% to account for a third of total sales on respectable trends for baby gear and preschool products. American Girl rounds out Mattel's business segment and saw sales rise 13% to make up roughly the remaining percent of sales.

Gross profits fell slightly but management was able to lower SG&A costs significantly to boost operating income by more than 57% to $109.3 million, or a very healthy 9.4% of total sales. Net income rose 56% to $80.5 million and share buybacks helped boost earnings per diluted share by more than 64% to 23 cents. This came in ahead of analyst projections.

Analysts currently project full-year sales growth of 6.6% for total sales of $6.2 billion and earnings of $2.07 per share. This would represent year-over-year profit growth of about 10%.

The Bottom Line
Sales growth has been anemic for Mattel over the past five years, averaging only about 2.5% annually, but appears to be picking up. This could help sustain what has been impressive profit growth, which has averaged 13% annually over the past five years. Free cash flow growth has been more erratic and fell well below reported net income in 2010, but should eventually improve if sales growth keeps up its current pace. This looks achievable as long as Disney keeps turning out movie hits and Mattel properly aligns its own product mix to leverage off of Disney's success.

Mattel's forward P/E currently stands at 11.6 and is quite reasonable given the profit growth in recent years. This is also slightly above the forward earnings multiple for arch rival Hasbro (NYSE:HAS), which trades at 11.3. Mattel's dividend yield of 3.4% is also superior to Hasbro's 2.8% current yield. Overall, given the reasonable valuation, profit growth consistency, and above-average dividend, Mattel shareholders can reasonably expect to rely on double-digit total returns going forward. (For additional reading, check out Dividend Facts You May Not Know.)

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