Popular Toymaker Could Deliver Double-Digit Gains Plus Income

In less than a month, Americans will celebrate Black Friday, the busiest shopping day of the year. People stand in line for hours to get blowout bargains, and many retailers’ cash registers will be stuffed. Immediately after Black Friday, the holiday shopping season begins, a critical time of year for many stocks.

#-ad_banner-#One retail company benefiting from the ramp-up to the holiday shopping season is the world’s largest toy company, Mattel (Nasdaq: MAT), which employs around 28,000 people in 43 countries and sells its products in more than 150 countries worldwide.
This year, the toy maker expects to earn 40% of its annual revenue during Black Friday and the holiday season. Even without this boost, however, Mattel has already had a stellar year and is on target to deliver record earnings for 2012.
Aggressive cost-cutting, effective international promotion of new toys, and attractive packaging designs, are some of the measures Mattel has taken to boost its bottom line.
Additionally, its $680 million acquisition of children’s TV producer, HIT Entertainment, is helping sales. The acquisition gave Mattel branding access to popular children’s figures like Thomas the Tank Engine, Barney and Bob the Builder.
Further growth is driven by increased sales of the classic Fisher-Price brand, as well as the American Girl and Monster High doll lines, and Disney Princess Toys. Even though classics like Barbie and Hot Wheels don’t have the appeal they once did, Mattel’s stock is shining.
The technicals point to further price appreciation ahead.
Shares have been on a major uptrend since hitting a low of $21.68 in August 2011. Since this time, they’ve climbed almost 70%.
In April 2012, the stock stalled at $33.98 resistance and struggled to maintain momentum over the following summer months. However, in mid-July, shares popped several dollars and again tested $33.98 resistance.
The following trading week, this resistance level was bullishly broken. As a result, an ascending triangle was completed. The triangle was marked by the major uptrend line and resistance near $34.
Shares continued to slowly climb over August and September, but got stuck at resistance near $36. However, during the Oct. 15 trading week, the stock spiked around $2 in a week, blasting past $36 resistance and moving on to hit a multi-year high of $37.96.
This Oct. 22 trading week, the stock is trading nearby, around $37. With no historical resistance in sight, shares could move higher. The stock could retest or surpass its all-time high of $40.99, hit in June 1998.
The bullish technical outlook is supported by strong fundamentals. In mid-October, the toy company reported much better-than-expected third-quarter results.
Due to strong sales of American Girl dolls and Fisher-Price toys, revenue for the period jumped 4% to $2.08 billion, compared to $1.99 billion in the comparable year-ago period.
Analysts expected revenue to be only $2.07 billion.
With continued demand going into the holiday season, analysts’ project fourth-quarter revenue will increase 4.5%, to $2.3 billion, from $2.2 billion last year. For the full 2012 year, analysts’ expect revenue will increase 3% to $6.5 billion, from $6.3 billion in 2011.
The earnings outlook is similarly strong. Third-quarter earnings exceeded analysts’ estimates of $0.99, coming in at $1.04 per share — a 21% increase from the $0.86 per share earned in the comparable year-ago period quarter. Management attributed the gain to successful cost-cutting measures combined with strong sales of popular brands, like Monster High dolls and Fisher-Price toys.
With holiday sales expected to be strong, analysts project fourth-quarter earnings will jump 7.5% to $1.15, from $1.07 in the comparable year-earlier period. For the full 2012 year, analysts expect earnings to rise 16% to $2.53, from $2.18 last year.
In addition to a strong fundamental outlook, the company appears financially strong. Management recently repurchased 139,000 shares of common stock. In addition, they raised the company’s annual dividend payout 35% from last year. Mattel now pays an attractive annual dividend of $1.24, yielding about 3.4%.
In addition to buying the stock, I am also going to earn additional income by writing covered calls. The April 2013 $42 strike price options currently are trading at about $0.43. Receiving this premium reduces the risk on the trade by $43 for every 100 shares purchased and puts cash into my account as well.
Risks to consider: With the proliferation of electronic game technologies, like iPads and apps, the younger generation is increasingly choosing electronic devices over physical toys. Long term, that could be a threat. However, for now, the company has a stronghold in the physical toy industry and has carved out a profitable niche in this area.

Action to Take –> Buy MAT at $37.06 or less. Sell one MAT April 42 Call for every 100 shares purchased. Set stop-loss for MAT at $33.96, slightly below important support. Set initial price target for MAT at $41.99 for a potential 13% gain by mid-2013. If the $42 strike price is hit, then surrender the stock and buy back the calls.
This article originally appeared on TradingAuthority.com: