We are upgrading our recommendation on the shares of Mattel Inc. (MAT) to Outperform from Neutral.

Mattel reported fourth quarter earnings of 89 cents per share. Excluding a tax benefit in the quarter, the company had earned 81 cents per share, well ahead of the Zacks Consensus Estimate of 68 cents a share. The company had earned 49 cents per share in the year-ago quarter.

The better-than-expected results were primarily driven by strong sales of its Barbie dolls and Hot Wheels cars during the holidays.

Mattel has an industry-leading position, a strong balance sheet and continues to experience the benefits of its cost-containment initiatives. Its focus on top line growth, margin expansion and cash conservation also augur well.

We also expect the top line to improve following the addition of new product lines for World Wrestling Entertainment and Thomas and Friends. The company has recently revamped the look of Barbie, which is attracting many customers. This has helped Mattel to experience strong sales during the last holiday season.

On the downside, we believe that the continuing economic stress will restrict significant top-line growth in the near term as the retail environment remains challenging. Though results improved during the fourth quarter of 2009, we noticed that full-year sales were significantly down from the prior year. Additionally, there was no major improvement in core sales.

However, we believe that the positives outweigh the negatives, and considering its current product line-up we have an Outperform recommendation on the shares of Mattel.

Zacks Investment Research

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