Leapfrog Enterprises: Stretching the Net/Net Definition

Those of you who are not familiar with this company may not be thinking hard enough, especially if you are parents of small children. California-based Leapfrog (LF) makes technology based educational products, aimed at sharpening children's skills, but in a fun and entertaining way (if you have a LeapPad lying around your house as we do, you'll know what I mean).

Leapfrog has had its share of challenges in recent years, evident by its stock price, and also by the fact that most analysts don't like it, which may be music to our Cheap Stocks ears.

The Fundamentals
There's been no topline growth for Leapfrog, and earnings have not been anything to write home about either. Fiscal 2005 sales of $649.8 million were flat with 2004 ($640.3), and down from 2003 ($680.0). The company earned $17.5 million in 2005, following a loss of $6.5 million in 2004, and income of $72.7 million in 2004. Costs, particularly SG&A, have also been increasing as a percentage of sales.

Seasonality
Leapfrog's business is seasonal; the company books the bulk of sales and earnings in the third (back to school season) and fourth (holiday) quarters. For the first two quarters of 2006, sales are off year ago levels.

Where are the Positives?
While operating results have not been stellar, Leapfrog has two things (in our minds, anyway) going for it: A fairly strong brand name, which we can't quantify in terms of value, and a strong balance sheet, which we can attempt to quantify. As of 6/30/06, the company had $181 million in cash and s/t investments, or $2.87 per share, in cash and no debt.

The company also currently trades at just 1.73 times market cap/net current asset. Not a net/net, we know, but a compelling valuation that bears further scrutiny.

Conclusion
We'll admit, we are at the beginning of our dance with Leapfrog. We don't currently own it, but are at the very least, intrigued. We know that this could be somewhat of a value trap, a company with a nice balance sheet, that can't get its act together in order to profitably move product. It's difficult being at the whims of young consumers, tastes change quickly, and competition is fierce. Still, its interesting to find a brand name company, in the $500 million market cap range, trading at less than twice NCAV.

Fundamentals
Price: $9.33
Market Cap: $588 million
Cash and s/t inv: $181
Enterprise Value: $407
Current Assets: $454.1
Current Liab: $94.7
Other Liab: $19.6
NCAV: $339.8
MktCap/NCAV: 1.73

Top Institutional Ownership
Third Avenue Management LLC: 14%
Ironbridge Capital Managemet: 4%
Prentice Capital Management: 2%
Brandywine Global Invt Mgmt: 2%

LF 1-yr chart:

Disclosure: The author does not have a position in this stock.