Mattel Inc. (MAT) is not required to submit its toys to independent laboratories for safety tests. However, other toy-makers, clothing manufacturers and companies selling products for young children need to send their samples for third-party testing.

The third-party testing law was passed last summer as there was a significant increase in the number of recalls of toys contaminated by lead. Interestingly, a number of those toys had been produced by Mattel and its subsidiary Fisher-Price.

According to the new law, third party testing is mandatory for both big and small companies making products for children 12 and under. Strict limits have been set for lead, lead paint and chemicals such as phthalates.

However, Mattel’s request to use its own labs has been recently granted by the Consumer Product Safety Commission (CPSC). According to CPSC personnel, Mattel has proved that its labs were protected from unwarranted corporate pressure. Similar requests from other companies are pending at CPSC.

Seven of Mattel labs are approved by CPSC as “firewalled third-party laboratories.” These labs are located in California in the US, as well as Mexico, China, Malaysia and Indonesia.

However, other companies which are required to do the test in independent labs are incurring huge costs.

The economic slowdown has severely impacted discretionary consumer spending, which has deteriorated sharply in the United States and in many countries around the world. As a result, the balance sheets of toy manufacturers such as Mattel, Hasbro Inc. (HAS) and JAKKS Pacific Inc. (JAKK) have been significantly impacted.

Mattel continues to feel the impact of the global recession and has recently faced difficulties with respect to margin pressures and deterioration in some of its core brands. Although the quarterly results contained some positive signs, in light of the current economic environment, we expect these challenging macro conditions to continue to put pressure on Mattel’s earnings throughout 2009.

As one of the dominant companies in the industry, however, the economic downturn may enable Mattel to strengthen its position at the expense of smaller rivals. Consequently, we have a Neutral recommendation on the shares of Mattel.
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