Mattel (MAT -0.52%) stock jumped sharply following a strong fourth-quarter earnings report on Feb. 9. Sales and profits were much better than investors expected, but most importantly, the Hot Wheels maker sees strong sales performance continuing in the near term, despite supply chain issues and higher consumer prices.

The stock is currently up 8.8% since reporting earnings, but management is now switching gears to driving long-term growth, and the stock still looks dirt cheap.

A child playing with a dollhouse.

Image source: Getty Images.

Growing toy industry

Despite near-term economic headwinds, Mattel's sales accelerated to 10% year-over-year growth during the holiday quarter. Management's cost savings initiatives drove solid performance on the bottom line, too, with adjusted earnings per share increasing by 33%. 

Mattel rival Hasbro also posted double-digit sales growth in the fourth quarter. These strong results reflect a resilient toy industry that has grown for 10 consecutive years, and sales remained firm during the pandemic. 

Parents are generally going to make room in the budget for toys. They are relatively affordable, and top brands like Mattel's Hot Wheels and Barbie benefit from steady demand trends. On that note, Mattel gained global market share within the dolls category in 2021, with Barbie ranking as the No. 1 toy brand globally. 

More growth

Management expects more growth in 2022. Guidance calls for sales to advance 8% to 10% in constant currency over 2021, with adjusted earnings per share (EPS) improving to a range of $1.42 to $1.48. That represents 10.7% year-over-year growth in adjusted EPS at the midpoint of guidance.

In 2022, Mattel expects strong growth from its power brands (Hot Wheels, Barbie, and Thomas & Friends) and action figures, driven by movie tie-ins with the upcoming releases of Jurassic World Dominion from Universal Pictures (owned by Comcast through NBCUniversal) and Lightyear from Walt Disney's Pixar. 

Marketing and designing dolls is Mattel's strength, and there are a few upcoming releases that serve as strong growth catalysts. Later this year, Mattel is relaunching Monster High, which management is calling "a meaningful growth driver in 2022 and beyond."  

Plus, Mattel's recent agreement with Disney to make dolls for top properties, such as Disney Princess and Frozen, should be a big sales driver in 2023. It will also be accretive to Mattel's profits next year, which is a bonus. 

Mattel is on sale

After spending the last few years turning the business around by improving sales growth and margins, CEO Ynon Kreiz said, "Our turnaround is complete. We are now in growth mode."  

With the stock trading at just 13 times management's 2023 earnings guidance, the stock is a relative bargain compared to Hasbro's forward price-to-earnings (P/E) ratio of 16 based on 2023 earnings estimates. 

Mattel is just getting started on its long-term goal to unlock the full value of its toy brands across entertainment platforms, including at the box office. The market is overlooking the value in toy stocks right now in favor of more exciting stories in other industries, but Mattel's value won't be overlooked forever if it continues to post balanced growth on the top and bottom lines.

All said, Mattel is a promising value stock to hedge against high-P/E stocks in a well-rounded portfolio.