A Hoppin' Pick For 2013

Feb. 8.13 | About: LeapFrog Enterprises (LF)

LeapFrog Enterprises INC (NYSE:LF) last night announced a phenomenal quarter that exceeded even the high end of analyst expectations. I see this stock moving significantly higher over the course of 2013. LF reported adjusted EPS of $0.60 versus the analyst estimate of $0.48. Here are the highlights of the results provided by YahooFinance:

Highlights of full year 2012 results compared to full year 2011 results:

  • Consolidated net sales were up 28%.
  • U.S. segment net sales were up 24%, and international segment net sales were up 38%.
  • Income from operations was up 170%.
  • Income from operations as a percentage of net sales was 11.0%, more than double the prior year.
  • Net income was $86.5 million, up 334%.
  • Net income per diluted share was $1.24, up $0.94.
  • Adjusted EBITDA was $93.1 million, up 89%.1
  • Cash and cash equivalents were $120.0 million as of December 31, 2012, up 67% compared to the balance as of December 31, 2011.

These numbers were in spite of doubts ahead of the earnings calls from the bear side citing poor performance results from other toy companies that are in the sector such as Hasbro (HAS) and Mattel (MAT). I believe that those companies however do not directly compete with LF as LF is in a niche market that provides educational materials in a fun way to children, emphasizing the education part of play.

After being up as much as 6% AH, LF was punished in morning trading, trading as low as $8.15. I believe this would have been a great opportunity to buy as I feel these shares are undervalued going forward after this great quarter and the outlook for the future.

LF products struggled to stay on the store shelves as demand during the holiday season was strong. LF actually had 3 products in the top 5 selling toys, and 4 out of the top 10 this holiday season. (Article)

LF was able to do all this in a weak global economy and a declining toy industry.

Going Forward

LF held the number one spot for best selling toy with its cartridges for the Leappad devices. Digital downloads, which are the highest-margin item for LF, grew by 4x compared to 2011, which will bode well for the company's earnings into the future. LF is a fundamentally healthy company with confident management that is investing in the future. LF has been making deals with digital download content providers such as Disney (DIS) and Festival Five Records to expand available content for purchase. LeapFrog also has room for International growth and has shown its strength in the International Market as they had 2 of the top 10 selling toys in the UK. Some argue that market share will receive competition from iPads and other tablet devices. Personally I would not give an iPad to a child, but for those who are willing to take that risk, LF is now launching a learn-to-read system that will be an app for the iPhone and iPad and will be available as well for the new Leappad tablet devices. Ray Arthur, CFO, showed the growth initiative of the company when providing guidance:

To support our market-leading growth and our ongoing business transformation, we plan to make long-term investments in content, international expansion, online communities, systems and new platforms. Even with this investment for the future, we expect our operating margin as a percentage of net sales to remain consistent with 2012.

This focus on maintaining strong margins while facilitating growth is why I believe LF is a great pick for 2013. I believe and entry under $9.00 would provide great room for growth as the market is yet to reward LeapFrog and their management for the great quarter they provided us.

About LeapFrog

LeapFrog Enterprises, Inc. is the leader in educational entertainment for children. LeapFrog's award-winning product portfolio helps millions of children achieve their potential by delivering best-in-class curriculum through engaging content, fun multimedia learning platforms and toys. The Learning Path, LeapFrog's proprietary online destination for parents and extended family, provides personalized feedback on a child's learning progress and offers recommendations to enhance each child's learning experience. Through the power of play, LeapFrog's products and curriculum help children of all ages prepare for school and life success. LeapFrog's products are available in more than 45 countries and have been used by teachers in more than 100,000 U.S. classrooms. LeapFrog is based in Emeryville, California, and was founded in 1995 by a father who revolutionized technology-based learning solutions to help his child learn how to read.

Disclosure: I am long LF at $8.60. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.