* Q3 EPS $0.06 vs est $0.03
* Revenue rises 9 percent to $128.3 mln
* Shares fall as much as 13 pct in Toronto (Recasts, adds details, analyst comments; updates share movement; in U.S. dollars unless noted)
By Bhaswati Mukhopadhyay
TORONTO, Nov 5 (Reuters) - Toymaker Mega Brands Inc MB.TO reported a third-quarter profit on Friday that beat market expectations, and said net sales of its toy product lines rose.
On an adjusted basis, the Montreal-based company earned $19.8 million, 6 cents a share, topping two analysts' average expectation of 3 cents a share. It earned $14.4 million, or 39 cents a share, a year earlier.
Revenue for the company, known for toys such as Mega Bloks and Thomas and Friends, rose 9 percent to $128.3 million. The two analysts had expected $127.4 million in revenue, according to Thomson Reuters I/B/E/S.
Mega Brands, which sells both its own brands and licensed toys, said net sales of toy lines rose 18 percent, led by Halo Wars and Dragons Universe in the boys category, and sustained growth in the preschool category.
However, net income fell to $16.3 million, or 5 cents a share, from $72 million, or $1.97 a share, a year earlier. The third quarter of 2009 included a one-time gain of $72.0 million from a favorable litigation settlement.
Shares of Mega Brands fell 13 percent on Friday morning to 53 Canadian cents on the Toronto Stock Exchange, but later recouped some losses to trade down 4 Canadian cents at 57 Canadian cents.
"The stock has been up 40 percent in the last two months, so perhaps there is some profit-taking on the earnings this morning," said Gerrick Johnson of BMO Capital Markets.
The company, which competes with privately owned Danish toymaker Lego, reduced is debt in March by about $290 million through a recapitalization transaction.
"They have been regaining a lot of shelf space. The company was on the verge of bankruptcy, did have some recall issues some years back, and so retailers and suppliers were afraid to do business with them. With the recapitalization transaction they are on much firmer footing," Johnson said.
Johnson, who has an "outperform" rating on the stock, said one of the Mega Brands' products that is doing very well is a licensed product called Halo Wars, an X-Box game that is licensed from Microsoft (MSFT.O).
The company said it is seeing good growth in North American toy sales and a strong rebound in international markets.
"In preschool, Dinosaur Train and Hello Kitty are joining our portfolio of evergreen products next year," it said. (Reporting by Bhaswati Mukhopadhyay, editing by editing by Rob Wilson)