At first glance,

Mattel

(MAT) - Get Report

doesn't look like the most compelling bargain out there. But investors could have some fun gaming this stock as the cash starts rolling in.

The stock is near its 52-week high and trading at almost 2 times sales, so obviously we're not talking about some undiscovered gem here. But I expect earnings growth to accelerate as the company continues to cut costs and expand its offerings.

For starters, as part of a push to juice its revenue line, the company has introduced a number of what it calls brand extensions -- offshoots of other existing toys. In fact, it's got about 15 newfangled products in the hopper, from "My Scene Barbie" (which sports in-vogue fashion trends such as low-rise jeans) to "Ello" (which is a building block set, similar to an erector set, but targeted toward girls ages 7 to 9). Also, the company has also broadened its customer reach by opening up new distribution channels through cross-promotion agreements with both

Wal-Mart

(WMT) - Get Report

and

Toys R Us

(TOY)

.

These initiatives are important because they'll help smooth out the boom-and-bust cycles the company has become known for. They also have the potential to help drive the company's revenue growth at a mid-single-digit clip for at least the next several years.

However, what really strikes my fancy -- and what most investors don't seem to appreciate -- is what the company is doing to address the cost side of the equation. Simply lay its Q1 financials side by side with last year's and you'll see what I mean. Receivables are down 26% year over year and 6% sequentially from the fourth quarter, to $655.6 million. Mattel has also reduced its inventory load by about 15% from last year and lopped more than $400 million in goodwill off its books.

In short, Mattel's improving revenue line, coupled with its slimmed-down cost structure, has made this a story about free cash flow -- cash from operations less capital expenditures and dividends. According to Morgan Stanley Dean Witter analyst Brian McGough, as new products gain traction, the company can reasonably expect to see its free cash flow increase from just over $520 million in 2002 to $705 million in 2004 -- implying annual growth of about 16%.

And with all the green stuff, Mattel should be able to roll out a bold new marketing campaign, buy back stock, pay down debt, you name it -- the possibilities are endless.

Fact is, either a modest 5-million-share buyback or a $50 million debt paydown (at 6% and change) could tag at least 2 cents onto annual EPS. Since Mattel's cash flow will give it the flexibility to undertake lots of measures like this, you could easily see earnings beating the current analyst consensus of $1.06 this year and $1.20 next.

Bottom line: Mattel's bulging toy pipeline and slimmed-down cost structure have set the stage for a cash harvest.

In keeping with TSC's editorial policy, Glenn Curtis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Curtis welcomes your

feedback.