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Friday, January 31, 2014 - 10:00

Goldman Sachs Is Wrong About This Well-Known Company

Friday, January 31, 2014 10:00 AM

Whether this industry's products are in a mansion owned by the wealthiest 1% or a poverty-stricken housing project, it plays an unmistakable role in nearly every family.

These products have nothing to do with basic needs like food or shelter -- they fall strictly into the "want" category. Yet this demand is so strong that this industry is an $84 billion global behemoth. Even the global economic downturn of 2007 to 2009 barely affected this industry's sales.

Those of you who have had children are probably familiar with this business -- the toy industry, to be specific. I am amazed at how recession-resistant this industry is, and I think the world's largest toy company is poised to be a great investment in 2014.

Mattel (NYSE: MAT) is a household name in the western world. Named for founders Harold "Matt" Matson and Elliot Handler, the company was born in a garage workshop in 1945. Mattel started out as a picture frame manufacturer but soon became a toy company after Matson and Handler found success selling dollhouse furniture built from scrap wood.

Mattel's first big break came when it acquired the rights to make products for the popular Mickey Mouse Club. The next in a series of hugely successful product launches was the ubiquitous Barbie doll. The company went public in 1960, and by 1965, sales had reached $100 million, pushing Mattel into the Fortune 500.

Flickr/Robert Couse-Baker
Brands such as Barbie, Hot Wheels, Matchbox, Fisher-Price and even Stretch Armstrong are among Mattel's stable of brands.

Over the past 50 years, Mattel has maintained its leadership role in the toy industry by launching some of the best-known and most enduring brand names ever. Brands such as Barbie, Hot Wheels, Matchbox, Fisher-Price and even Stretch Armstrong are among Mattel's stable of brands.

Today, Mattel boasts a market cap above $14.5 billion and annual revenue of more than $6.6 billion. Trailing 12-month gross profits were slightly more than $3.4 billion, and earnings before interest, taxes, depreciation and amortization (EBITDA) was just over $1.4 billion. The company has $406 million in cash on hand.

The third quarter of 2013, the latest reported quarter, shows worldwide sales higher by 5%. Earnings per share (EPS) jumped from $1.04 in the same quarter last year to $1.21 in the current quarter. Most telling, Mattel bought back 6.1 million of its own shares for about $259 million during the quarter.

My favorite thing about this company is its dividend history. Mattel is pays a quarterly dividend of $0.36, which equals a current dividend yield of 3.3% on a payout ratio of 57%. The five-year average dividend yield is 3.7%.

Mattel's share price has fallen from a high of $48 last month to just above $42. Price has broken both the 50- and 200-day simple moving averages on the downside, with selling accelerating recently.

The current selling is likely due to a recent move by Goldman Sachs to downgrade Mattel from "neutral" to "sell" due to what it views as decelerating U.S. retail trends and an expected miss in fourth-quarter earnings. MAT could fall a little more before bargain hunters step in and lift share prices. Technical support exists at $40.

Risks to Consider: While Goldman's downgrade will likely influence the stock price in the short term, I am expecting better things for the company in the fourth quarter. Remember to use stop-loss orders and diversify when investing.

Action to Take --> I really like Mattel as a long-term investment. My suggestion is to buy at the close of the first positive day for the stock. Stops should be set at $39.50, and my 52-week target price is $48. Sophisticated investors can dollar-cost average their entry down to support at $40.

P.S. A solid dividend and sizable share buybacks are only two of the ways in which companies can reward their shareholders. Our resident dividend expert Nathan Slaughter recently sat down for an exclusive interview with a man Wall Street pundits are calling a "genius" and someone with "simply too many good ideas" to talk about an exciting new strategy that beats the market -- and regular dividend investing -- hands down. The strategy is so simple, we can't believe more people aren't investing this way. To watch the full interview, click here.

David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.