If you’re an American consumer with small children, the chances of interacting with something made by toy giant Mattel (Nasdaq: MAT) are probably no less than 99.999998%. Whether you’re always stepping on the cold, die-cast metal of a Hot Wheels car your son always manages to leave out in the living room ,or being overwhelmed by the pink of the Barbie and Disney Princess collection in Wal-Mart’s (NYSE: WMT) vast toy aisle, there’s no avoiding the company’s grip.

This is a stock Warren Buffett would love
I can’t even imagine what I’ve contributed to Mattel’s earnings per share (EPS) during the past 12 years but, suffice it to say, there’s a good shot I could get a seat on the board of directors. They probably don’t need my help, though. After all, few U.S. businesses are capable of sustaining franchises like Barbie or Hot Wheels for so long…

Born in 1946 at the doorstep of the Baby Boom, Mattel has enabled American parents to indulge their kids and has built one helluva business in the process. How strong it is? In 2010, the company registered $1.13 billion in global revenue from Barbie alone, outpacing Hot Wheels, which turned in $822 million — nothing to sneeze at either. Other well-known brands include Fisher Price, American Girl, Masters of the Universe (yes, they’re still around) and the characters of the DC Comics Universe.

Mattel’s product pipeline looks strong for 2012 and 2013. The new Batman movie, “The Dark Knight Rises,” and “Superman: Man of Steel” are likely to give some muscle to second-half 2012 sales, along with tie-ins to a Green Lantern animated series slated for a 2012 launch. Mattel has also always maintained a strong strategic relationship with Disney (NYSE: DIS), which has translated into mega sales based on the Pixar animated “Toy Story” and “Cars” franchises.

Sales growth are also expected to be impressive. Revenue is poised to grow by 7% from $5.85 billion for 2010 to a projected $6.26 million for 2011. This translates into EPS growth of 13.4% from $1.86 in 2010 to a projected $2.11 this year — not bad for a consumer discretionary in the face of, at best, tepid consumer confidence. (Although your three-year-old thinks differently when she wants an Elmo doll… yes… blame Mattel.) Again, when your franchise is built on a foundation as solid as Mattel’s, you tend to deliver those kinds of results.

A toy-box chock full of iconic brands along with the solid financials is precisely why Warren Buffett might dig shares of Mattel. The company has an excellent cash position, with more than $1 billion in the kitty. Historically, Mattel’s long-term debt-to-capital has bounced in the 20- to 25% range, which is quite comfortable for a company with so much cash and a nearly $9 billion market cap. Return on equity is no slouch either. The 9-year average has been about 24% — very strong for a manufacturer.

Despite the unpredictability of its target market, Mattel has succeeded through 65 years during which it endured, multiple recessions, energy crises, domestic political turmoils and rapid cultural shifts. Why? At the end of the day, Mom and Dad want to give Junior what Junior wants, if they are able to. And few businesses are as good as Mattel at knowing what Junior wants.

A killer franchise, excellent financial management and a modest valuation at about 12.6 times forward earnings… Whadda ya say, Mr. Buffett? Can I put you down for about a gazillion shares?

Risks to consider: Mattel faces some headwinds. Being in the consumer discretionary aisle of the equity market with persistently high U.S. unemployment and an anemic economy can be a challenge to stock-price performance if the company doesn’t execute. What else could stand in the way? A softening global economy is a factor. Cost pressures due to higher commodity prices and Chinese wage inflation (Mattel’s workshop) can also throw cold water on margins. In addition, a poor showing at the box office can affect sales of licensed products.

Action To Take –> Mattel shares currently trade at about $27.15, which is less than 5% off of its 52-week high. This is not bad, considering the drubbing the broader market has received recently. Shares also pay a nice 3.4% dividend, which is considerably more than the 0.9% offered by the five-year Treasury. With a strong balance sheet, consistent performance and two legendary franchises, a 12-month price target of $34 is in order (boosting the forward P/E to 16 times earnings). Factoring in the dividend, that’s a potential total return of better than 28%.