Buy Recommendation By Justin Ivory and Ryan Powell

Toy Industry Up to Toy Industry Up to 20062006

CARR up 2.2% CARR up 2.2% 0 to 10 Group0 to 10 Group

Population GrowthPopulation Growth

90% of Mattel’s 90% of Mattel’s Revenue Comes Revenue Comes

From This From This SegmentSegment

2005 Article: Growth Continues in Mass/Discount 2005 Article: Growth Continues in Mass/Discount Channel Channel and Online Toy Salesand Online Toy Sales

RETAIL SALES IN THE U.S. TOY INDUSTRY DECLINED LESS RETAIL SALES IN THE U.S. TOY INDUSTRY DECLINED LESS THAN FOUR PERCENT IN 2005 THAN FOUR PERCENT IN 2005 to just over $21.3 billion compared to to just over $21.3 billion compared to $22.1 billion generated the prior year, according to The NPD Group. Retail $22.1 billion generated the prior year, according to The NPD Group. Retail channel performance shows continued share growth in the Mass/Discount channel performance shows continued share growth in the Mass/Discount channel. The mass marketers and discounters represented 54 percent of total toy channel. The mass marketers and discounters represented 54 percent of total toy sales in 2005, while Toy Stores represented 20 percent. Online toy sales sales in 2005, while Toy Stores represented 20 percent. Online toy sales continued to increase as well, generating over $1.3 billion in 2005, a 2.6 percent continued to increase as well, generating over $1.3 billion in 2005, a 2.6 percent increase over the prior year, and accounting for approximately 6 percent of sales increase over the prior year, and accounting for approximately 6 percent of sales for the year. for the year.

ALTHOUGH TOTAL TOY INDUSTRY SALES DECLINED IN 2005, ALTHOUGH TOTAL TOY INDUSTRY SALES DECLINED IN 2005, MANY CATEGORIES, MANY CATEGORIES, such as Building Sets and Learning/Exploration toys, such as Building Sets and Learning/Exploration toys, PERFORMED VERY WELLPERFORMED VERY WELL, showing positive sales growth over the prior , showing positive sales growth over the prior year.year.

n addition, n addition, ENTERTAINMENT FRANCHISES LIKE DORA THE ENTERTAINMENT FRANCHISES LIKE DORA THE EXPLORER ARE DRIVING TOY SALESEXPLORER ARE DRIVING TOY SALES, and the Star Wars franchise has , and the Star Wars franchise has contributed to both the Action Figures and Building Sets categories. contributed to both the Action Figures and Building Sets categories. While some categories dropped in sales, there were still some impressive While some categories dropped in sales, there were still some impressive increases among some sub-categories. Although the Dolls category had a dollar increases among some sub-categories. Although the Dolls category had a dollar sales loss of two percent in 2005, various sub-categories such as Large Dolls, and sales loss of two percent in 2005, various sub-categories such as Large Dolls, and Soft Dolls showed healthy increases of 18 percent and 13 percent. Soft Dolls showed healthy increases of 18 percent and 13 percent. THE THE GAMES/PUZZLES CATEGORY MAY HAVE DECLINED BY 9 GAMES/PUZZLES CATEGORY MAY HAVE DECLINED BY 9 PERCENT, BUT THE FAMILY BOARD/ACTION SUB-CATEGORY PERCENT, BUT THE FAMILY BOARD/ACTION SUB-CATEGORY GREW 18 PERCENT, ELECTRONIC HANDHELD/TABLETOP GREW 18 PERCENT, ELECTRONIC HANDHELD/TABLETOP GAMES GREW 14 PERCENT GAMES GREW 14 PERCENT and Puzzles were up by 4 percent over the and Puzzles were up by 4 percent over the prior year. prior year.

Company’s Future Company’s Future FocusFocus• Growing Birth RateGrowing Birth Rate

Baby GearBaby Gear• Children Health MovementChildren Health Movement

The Smart Cycle: The Smart Cycle: “ “Combining child fitness with learning and fun.”Combining child fitness with learning and fun.”

• International ProgressInternational Progress10% International CAGR Since 200010% International CAGR Since 200044% of Revenue From Outside of U.S.44% of Revenue From Outside of U.S.

• Movie LicensesMovie LicensesBatmanBatmanSpeed RacerSpeed RacerKung Fu PandaKung Fu Panda

• American Girl GrowthAmerican Girl GrowthMoviesMoviesNew StoresNew Stores

• Product Cost and QualityProduct Cost and QualityLEAN ManufacturingLEAN ManufacturingCut Product Costs w/ Steel Rather than ZincCut Product Costs w/ Steel Rather than Zinc

Lead ToysLead Toys • Toy Recalls in mid- September have Toy Recalls in mid- September have plummeted Mattel’s stock prices.plummeted Mattel’s stock prices.

• Recalls are slowing whileRecalls are slowing whileMattel has implemented the “Three Point Checking Mattel has implemented the “Three Point Checking System”System”

• "This Christmas could end up the safest one of all.“"This Christmas could end up the safest one of all.“

That's the conclusion of an article about toy safety in the That's the conclusion of an article about toy safety in the September 6, 2007 issue of September 6, 2007 issue of Time MagazineTime Magazine focused on the focused on the cooperative efforts of TIA and lawmakers to develop tough cooperative efforts of TIA and lawmakers to develop tough new toy safety inspection systems - including a new proposed new toy safety inspection systems - including a new proposed third-party testing accreditation program in partnership with third-party testing accreditation program in partnership with the American National Standards Institute (ANSI).the American National Standards Institute (ANSI).

Other NewsOther News • The 2007 HolidayThe 2007 Holiday™™ Barbie Barbie®® Doll Anticipated to Doll Anticipated to Top Lists this Gift-Giving SeasonTop Lists this Gift-Giving Season

EL SEGUNDO, Calif. (October 16, 2007) -EL SEGUNDO, Calif. (October 16, 2007) - The 2007 Holiday™ The 2007 Holiday™ Barbie® doll, a much anticipated and cherished holiday gift for Barbie® doll, a much anticipated and cherished holiday gift for children and adults alike, is officially released to stores for this year's children and adults alike, is officially released to stores for this year's gift-giving season. The first holiday-themed Barbie® doll was gift-giving season. The first holiday-themed Barbie® doll was introduced in 1988 and continues to be one of the most popular introduced in 1988 and continues to be one of the most popular collectible Barbie® dolls today. The annual introduction of the holiday-collectible Barbie® dolls today. The annual introduction of the holiday-themed Barbie® doll brings generations of girls, women and collectors themed Barbie® doll brings generations of girls, women and collectors together in celebration of both the holidays and Barbie®, a doll that together in celebration of both the holidays and Barbie®, a doll that has inspired girls of all ages to be anything they want to be for nearly has inspired girls of all ages to be anything they want to be for nearly five decades.five decades.Created by Mattel designer Sharon Zuckerman, the 2007 Holiday™ Created by Mattel designer Sharon Zuckerman, the 2007 Holiday™ Barbie® doll is the newest addition to a long tradition of festive and Barbie® doll is the newest addition to a long tradition of festive and beautiful, holiday-themed Barbie® dolls. This year's doll epitomizes beautiful, holiday-themed Barbie® dolls. This year's doll epitomizes holiday glamour with a Santa-inspired "Miss Claus" look. The 2007 holiday glamour with a Santa-inspired "Miss Claus" look. The 2007 Holiday™ Barbie® doll features a strapless, crimson velvet gown Holiday™ Barbie® doll features a strapless, crimson velvet gown trimmed with white faux fur, black lace and accessorized with a black, trimmed with white faux fur, black lace and accessorized with a black, wide Santa-inspired belt. Dazzling earrings and necklace as well as wide Santa-inspired belt. Dazzling earrings and necklace as well as glamorous white opera-length gloves, complete the ensemble.glamorous white opera-length gloves, complete the ensemble."The 2007 Holiday Barbie doll is the ultimate holiday keepsake, "The 2007 Holiday Barbie doll is the ultimate holiday keepsake, combining the warmth and spirit of the season with the glamour and combining the warmth and spirit of the season with the glamour and beauty of Barbie" said Liz Grampp, director of marketing, Barbie beauty of Barbie" said Liz Grampp, director of marketing, Barbie Collector.Collector.

Other NewsOther News • Mattel Announces Voluntary Recall of Single Product Mattel Announces Voluntary Recall of Single Product (Oct. 29)(Oct. 29)

EL SEGUNDO, Calif., - Mattel, Inc. announced that, as a result EL SEGUNDO, Calif., - Mattel, Inc. announced that, as a result of the company's extensive investigation of toys manufactured of the company's extensive investigation of toys manufactured prior to the implementation of the three-point check testing prior to the implementation of the three-point check testing system, the company has voluntarily recalled a production run system, the company has voluntarily recalled a production run of a single product sold in three markets due to impermissible of a single product sold in three markets due to impermissible levels of lead. levels of lead.

Ratios Mattel Industry

P/E Ratio 14.22 17.22

Beta 0.89 1.20

Return On Equity 23.93 25.00

Return On Assets 11.16 12.39

Price to Sales 1.27 1.86

Gross Margin 46.50 43.30

Operating Margin 12.85 16.33

Net Profit Margin 9.47 10.53

Payout Ratio 44.73 28.49

Key RatiosKey Ratios

10 Year 10 Year GraphGraph

One Year One Year GraphGraph

Analysts Analysts (Other Than Motley Fool)(Other Than Motley Fool)

MarketWatch.com

Average Recommendation: OVERWEIGHT

Number of Ratings: 9

FY Report Date: 12 / 2007

Last Quarter's Earnings: 0.61

Year Ago Earnings: 1.37

Average Target Price: 28.00

Current Quarters Estimate: 0.74

Current Year's Estimate: 1.50

3 Period Growth Model&

Relative Valuation

Value ConclusionsValue Conclusions

Analysts’ Price = 28.00Analysts’ Price = 28.00

Valuation Price = 21.00 Earning 15% Valuation Price = 21.00 Earning 15% or 24.15or 24.15

Relative Valuation = 25.21 (Average Relative Valuation = 25.21 (Average Return)Return)

Average Price of 3 Methods = 25.79 Average Price of 3 Methods = 25.79 or 23.44% or 23.44%

Final ConclusionsFinal Conclusions

I expect this stock to rise as Christmas I expect this stock to rise as Christmas approaches with the potential of a gain approaches with the potential of a gain greater than our 15% requirement greater than our 15% requirement depending on unforeseen events and a depending on unforeseen events and a bullish market. bullish market.

Therefore, I believe Mattel (MAT) should Therefore, I believe Mattel (MAT) should be purchased at its present day price of be purchased at its present day price of $20.89/share in a quantity of 300 to 500 $20.89/share in a quantity of 300 to 500 share (depending on cash availability.) It share (depending on cash availability.) It should then be expected to rise to should then be expected to rise to approximately 24.00/share (15% return) approximately 24.00/share (15% return) with a good chance that it will reach with a good chance that it will reach 25.74/share (23.44%) and with an 25.74/share (23.44%) and with an approximate 19% chance it will rise to approximate 19% chance it will rise to 28.00/share (34% return.) 28.00/share (34% return.)

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