4 Reasons To Leap Into LeapFrog

| About: LeapFrog Enterprises (LF)

LeapFrog (NYSE:LF) engages in educational entertainment for children. The company is a leader in their industry as they have won "Educational Toy of the Year" eight of the thirteen years the Toy Industry Association has granted the award. Their flagship product is the LeapPad which is a tablet specifically designed for children and assists in learning and child development. The company originally released the LeapPad in 2011 and followed with the release of the LeapPad2 in 2012.

On June 25th the company announced the follow up to the LeapPad2, the LeapPad Ultra. The new incarnation of the LeapPad will make several improvements to its predecessor including increased storage, front and back cameras, Wi-Fi and LeapSearch, which is a kid-safe web browser that parents can trust. LeapPad Ultra will go on pre-sale in the U.S. on July 17th and be available in early August.

LeapFrog Stock

As of July 14th, LeapFrog's stock was trading at $11.19 for a market cap 762.33 million. Its 52 week range went from a low of $7.00 to a high of $12.28. Shares have been on a nice run since the announcement of the new LeapPad Ultra going from $9.63 to $11.19 since June 25th.

4 Reasons to Leap into the Stock

1) Ramp up in seasonal sales

Looking at the LeapFrog annual report, their business is highly seasonal with the majority of sales taking place in the 2nd half of the year. The results of the operations have been historically better in the second half of the year:

Percent of total net sales:
















One indicator to look at to judge if LeapFrog will have a great 2nd half of the year is to look at pre-sales of the new LeapPad Ultra. If demand and buzz are good you can get an indication of if the company will meet the seasonal ramp up numbers. If the LeapPad Ultra gets nominated and wins majors awards like its predecessors, you can expect huge sales going into Christmas.

2) Cash and Equivalents

LeapFrog also has a sizable cash position. At the end of the first quarter 2013 the company reported cash and equivalents of $189.7 million. As of the July 14th market cap the cash represents 24.8% of the market cap, which is extremely high. In the annual report, the company says it has no foreseeable plans to issue a dividend. Since the company does not plan to issue a dividend, the cash could be used for future stock buybacks or acquisitions. If the company does nothing with the cash, it could become a bigger acquisition target. Any of these scenarios would be good for shareholders. In addition to the cash, the company has minimal liabilities which make its balance sheet even more attractive.

3) Growing International Sales

LeapFrog also has an opportunity to keep growing international sales. From 2011 to 2012 the company grew international sales by 38%. The growth was driven by primarily English speaking countries such as the UK, Canada and Australia. In fact, the United Kingdom accounted for 37% of the company's international sales. In 2012 they released a French version of the LeapPad 2 and there are still many other territories they can expand into.

4) Educational Growth

According to Chairman William Chiasson in the 2012 letter to shareholders: "achievement at kindergarten entry is correlated with later academic success, yet almost half of all kindergarten children arrive underprepared. Many children entering primary schools are not able to recognize numbers or letters. Additionally, only 69% of high school students graduate. For the first time in history, America's younger generation is less well-educated than its parents. The fact that more than half of Americans are dissatisfied with the quality of education that students receive in the U.S. is not surprising."

As a result of these trends, it is estimated that the markets for global K-12 eLearning and Edu Gaming will grow at 33% and 30% compounded growth rates over the next 5 years. As an education only company, LeapFrog will be positioned well to take advantage of this trend.


In addition to looking at catalysts, it is also important to look at some of the risks involved. One of the company's risks in its 10-K is:

"We currently compete primarily in the learning toy and electronic learning-aids category of the U.S. toy

industry and, to some degree, in the overall U.S. and international toy industry. We also compete, and may increasingly compete in the future, with makers of popular tablets, smart mobile devices and mobile game platforms. Each of these markets is very competitive and we expect competition to increase in the future. For example, in 2012 our LeapPad products faced competition from several tablets designed for children and from general-purpose tablets made by major electronics manufacturers. Many of our direct, indirect and potential competitors have significantly longer operating histories, greater brand recognition, and substantially greater financial, technical and marketing resources than we do."


Despite the risk of increased competition, LeapFrog is well positioned going forward. The company has a reputation for quality products as evidenced by winning the most major awards of any kid's tablet. When buying an educational tablet for a child, reputation goes a long way. LeapFrog also has a stellar balance sheet and international growth prospects ahead.

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.