Seeking Alpha
Research analyst, growth, value, IPOs
Profile| Send Message|
( followers)

Shares of Leapfrog (NYSE:LF) traded down 2.7% on Thursday. This decline came despite an earnings and revenue beat. Leapfrog, which was one of my top ten picks for 2013, continues to provide long term opportunities for patient investors as the company expands internationally and may become a key acquisition target.

In the first quarter, sales grew 15% to $82.9 million. Analysts were expecting sales of $79.47. Earnings per share increased to a loss of $0.04. Analysts were expecting the company to post a loss of $0.07. This double beat was driven by strength in domestic and international sales. Sales in the United States were up 11%, while international sales saw a huge increase of 26%.

The best is yet to come for the rest of 2013 as Leapfrog fills the second half with new releases and international expansion. In March, the company launched a new multimedia line. The company called it "kid tough, kid safe and kid fun, and most importantly, offers rich nutritional education."

From the conference call, management had this to say:

And just this week, we unveiled our LeapReader line of learn to read and write products at 2 major media events in New York City. Many influential consumer, business and tech media journalism bloggers attended these events. The LeapReader line received extremely positive feedback and some great early media coverage. In June, like the last couple of years, we will announce to consumers our new tablets, toys and content for the second half of 2013.

Obviously, the new product lineup should create a surge of buying in shares of Leapfrog. The company had the toy of the year in the LeapPad 2 for 2012. Leapfrog also found other products of its own on the top ten bestselling toys list.

Shareholders seem to be underestimating the company's products other than the LeapPad 2. Investors may also see Leapfrog as more of a one hit wonder, with shares falling down on the year, despite a wonderful 2012. I think the announcement of new products in June will be key to get investors excited again and perhaps new money into the shares.

Free cash flow increased 12% in the first quarter. Leapfrog continues to bring in huge amounts of cash, leading analysts to question what the company will do with it. When asked about share buybacks, the company said they were more interested in acquisitions and new product releases to generate revenue. Leapfrog ended 2012 with almost $3 per share in cash, creating a bargain of a price to earnings ratio, when cash is stripped out.

Recently, I discussed how international sales will power Leapfrog going forward. In 2012, international sales hit $156 million. While this is a large percentage increase from the 19% in 2009, it still is well off of rivals. Mattel (NASDAQ:MAT) and Hasbro (NASDAQ:HAS) saw international sales contribute 44% and 46% of total sales, respectively.

Leapfrog saw 2012 sales up 59% in the United Kingdom, +32% in Canada, and +33% in France. The amazing part of that is the LeapPad 2 will actually be released in France in the later part of this year, giving the country another chance for a huge increase in sales.

I continue to believe Leapfrog is an acquisition target of a larger rival like Mattel, Hasbro, Apple, or Amazon. However, with Leapfrog's new line of products and a focus on acquiring brands of its own, it's time to get behind this stock and not to worry about buying for a buyout.

Leapfrog reiterated full 2013 guidance. The company expects net sales to increase by high single digits. Leapfrog also thinks earnings per share will fall in a range of $0.57 to $0.60. Analysts on Yahoo Finance see the company earnings $0.65 for the full year. Analysts see revenue hitting $624.7 million, an increase of 7.5%. My guess is analysts are underestimating 2014 sales, by projecting only a 5.3% increase.

Over the first three months of 2013, Leapforg was down a modest 0.8%. Since then, shares have fallen even further. In June, the company will report new product launches. If you're looking at buying shares, it would be wise to do so before new tablets and learning toys are released to the public.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in LF over the next 72 hours. 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.

Source: Leapfrog Has International Expansion And New Products To Excite Investors