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Following solid second quarter 2012 results that included an earnings surprise of 33.3%, shares of Mattel Inc. (MAT - Analyst Report) have risen nearly 13%. Consequently, analysts made significant upward revisions to their estimates for 2012 and 2013, helping this toy manufacturer achieve a Zacks #2 Rank (Buy).

Along with these positives, a fairly impressive dividend yield of 3.9% and a continuous share buyback program make MAT a good pick for investors looking for both growth and income.

Impressive Second Quarter

On July 17, Mattel reported second quarter earnings of 28 cents per share, outpacing the Zacks Consensus Estimate by 7 cents or 33.3% and the year-ago earnings by 5 cents or 21.7%.

Net sales remained flat year over year at $1,158.7 million, but were higher than the Zacks Consensus Estimate of $1,139.0 million. Net sales included an unfavorable foreign currency impact of 4%.

Worldwide gross sales soared for the core brands – Barbie (up 5%) and Hot Wheels (up 11%). Sales for Other Girls Brands shot up 96%, driven by Monster High. Fisher-Price Brands climbed 2% to $407.3 million, while the American Girl line rose 3% to $68.7 million. However, worldwide gross sales for the Mattel Girls & Boys Brands business unit declined 1% from the year-ago quarter to $781.6 million.

Gross profit increased 7% to $594.5 million and gross margin expanded 340 basis points (bps) to 51.3% due to a 240-bp plunge in cost of sales.

Double-Digit Earnings Momentum?

The Zacks Consensus Estimate for 2012 rose 2.1% in the past 30 days to $2.44 per share on upward revisions from 8 of 10 estimates. The current estimate implies year-over-year growth of 11.8%.

The Zacks Consensus Estimate for 2013 is up 1.1% in that time to $2.71 per share, aided by 7 upward revisions out of 12 estimates. The current estimate suggests year-over-year growth of 11.2%.

Enhancing Shareholder Value

In January 2012, the toy company hiked its quarterly dividend by 35% to 31 cents per share, representing a yield of 3.9%. The company’s current yield is also higher than its trailing 12-months average dividend yield. In contrast, the average dividend yield of the industry is less than 2%. Since 2002, the company has increased its dividend 8 times and even continued to pay during the recession.

The company returned over $850 million to its shareholders in fiscal 2011, including share buybacks and quarterly dividends. Management continues to target a payout ratio of 50% to 60% in 2012.

Reasonable Valuation

Considering the company’s growth prospects, its valuation looks reasonable. Mattel is currently trading at a forward P/E of 14.5X, a premium of 6.2% to the peer group average of 13.6X. In addition to P/E, the stock is also trading at a forward P/B of 4.63 and a P/S of 1.92, compared with the peer group’s P/B of 1.49 and P/S of 1.07.

Moreover, the company has 1-year return on equity (ROE) of 30.7%, substantially higher than its peer group average of 2.5%. The company also has a long-term estimated earnings per share growth rate of 7.9%.

Chart Reveals Strength

Since October 5, 2011, Mattel shares have consistently fared better than the simple moving average for 200 days or SMA (200). Moreover, after the announcement of the company’s second quarter earnings, the stock also started trading above its 50-day moving average. The year-to-date return for the stock is noteworthy at 26.87%, compared to a S&P 500 tally of 10.60%.

'Based in El Segundo, California, Mattel has numerous well-known traditional toy brands that have been category leaders in multiple product segments for a number of years. Barbie and Hot Wheels remain the premier toy brands for girls and boys, respectively. The company generates the largest part of its revenue from the Mattel Girls & Boys Brands segment. Other segments include Fisher-Price Brands and American Girl Brands. With a market capitalization of $12.0 billion, Mattel primarily competes with JAKKS Pacific, Inc. (JAKK) and Hasbro Inc. (HAS).

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