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Leapfrog Enterprises Inc.

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November 29, 2011 – Comments (1) | RELATED TICKERS: LF.DL

Leapfrog has been on and off my radar for a while now.  The thing that most recently drew my attention to them and actually made me take a look at their financials is their new Leappad tablet, which is a tablet specifically designed for kids.  The leappad is one of the hot toys out this Christmas and is basically sold out most everywhere.  This very high demand has led some small internet based retlailers to up their price on the product, which regularly sells for $99, by 150-300%.

But how do people actually like the product?  The leappad received a platinum "best toy" award by the Oppenheim Toy Portfolio, which is an indpendent site that reviews toys.  The Amazon reviews for the most part are very positive as well... many of the negative reviews have to do with the prices some of the indpendent Amazon retailers are charging for this hard to find item.

The tablet comes with a built-in camera that can be used to take pictures and videos (not high-res), is backwards compatible with all the cartridge games from their leapster handheld devices, as well as having other apps, games, books, that you can download onto it from the internet through the leapfrog site.  Like many other Leapfrog products the device connects to your computer through a usb cable so that you can upload and track your child's learning progress throug the leapfrog site. 

In terms of competition the only other kid oriented tablet is the vtech innotab, which is slightly cheaper (apps are also cheaper), doesn't have a camera like the leappad, and has a more mixed set of reviews that I can find.  I don't think it's had the same demand surge either, but I can't confirm that.  After that the only direct competition is "real" tablets with kids apps downloaded.  An iPAD 2 goes for $500+ dollars and even a kindle fire is $200+.  Once a kid hits a certain age and can be trusted enough not to insta-destroy a higher end tablet, that's probably okay.  For toddlers I'd want something more durable that doesn't involve me watching the kid like a hawk the whole time he/she is holding it.  The leappad says it's for 4-9 year olds but I'm thinking it's probably going to get used most by the 2-5 age group.  You might be wondering if toddlers even care about tablets, and if you have a toddler at home you already know the answer is yes.  Here's a bloomberg article on the subject for those who don't want to take my word on it.

The kindle, ipad, other adult tablet is a better more versatile product than the leappad.  That shouldn't be a question or even really that important if you're thinking more about buying the stock and not the tablet itself.  The important thing is that leapapd is a tablet they can give to small children and not have to worry about them breaking.  Even more important is that its selling like hotcakes.

Leapfrog Enterpirses has a current market cap 325Mish.  I totally think this one product is going to drive their sales over the next quarter, which like most toy makers, is traditionally the company's strongest quarter.  The stock popped in early November after they posted EPS of .35, which beat analyst estimates by .08/share.  That was the 5th quarter in a row they beat estimates and I think that trend will continue.  The leappad was a new product that came out during the company's last quarter and unfortunately the % of revenue derived from that one product was not broken out.  Gross profit margin decreased slightly year over year but operating profit margin, RoA, and RoE were all up which I take as generally positive.  The company had no debt at the time of reporting, though they did state they were going to draw down on line of credit shortly after the report came out and that they planned on having the line of credit paid back off in December.

The stock has been hitting major resistance at $5/share and it currently trades at roughly 26x TTM earnings.  That seems high when compared to Hasbro or Mattell's 12-14x earnings.  The company is only trading at 11.5 projected FY12 earnings though and I really don't think those earnings projections were taking into account the high demand for the leappad into account.  I'm thinking there's a good chance the stock can hit $6 within 3-4 months, which would be a 20% gain from current prices.  I think demand for the product will easily remain strong for that short a window.  After that things get murkier and will depend greatly on how well they support or improve their product line. 

I have no idea if Hasbro or Mattel, which don't currently make a tablet aimed at kids, plan on entering that market, or if they would entertain the idea of trying to aquire LF while it's pretty cheap.  I think either of those scenarios would most likely happen outside of the 3-4 month time frame that I'm interested in.

I don't currently own any LF shares but I do plan on aquiring some on any significant market pull back. 

1 Comments – Post Your Own

#1) On December 03, 2011 at 3:49 PM, Monica109 (88.80) wrote:

I just visited my daughter in Texas and my granddaughter will be 4 years old in two weeks.  My daughter and son-in-law are adamant that they need to give the LeapPad to my granddaughter for Xmas!

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