3 Predictions For LeapFrog's Earnings

Feb.11.14 | About: LeapFrog Enterprises (LF)

LeapFrog Enterprises (NYSE:LF) is scheduled to release its fourth-quarter and full-year earnings on Wednesday. It's always entertaining to predict LeapFrog's earnings every quarter and see how those predictions match up with actual results. This does not change my decision or outlook in this company, but it has always proven to be a fun exercise. As such, I have decided to share my predictions this quarter, in order from what I believe as most to least likely to occur.

LeapFrog's Q4 earnings will beat analyst estimates.

In my mind, this is a no-brainer. From the revised FY 2013 projections, LeapFrog's management expect "net income per diluted share (GAAP) and normalized net income per diluted share (non-GAAP) to both be in the range of $0.36 to $0.46."

Taking into account that LeapFrog's actual earnings per share were $.04, -$.05 and $.38 in Q1, Q2 and Q3, respectively, LeapFrog's projections fail to make logical sense at between $.08 and $.18 for Q4 2013, which is traditionally LeapFrog's best quarter in terms of revenue.

Furthermore, LeapFrog management gave four reasons for lower FY 2013 guidance on the Q3 2013 conference call:

  1. Challenging retail environment
  2. Greater tablet competition
  3. Six fewer holiday shopping days
  4. Lower POS sales

The first three issues listed above were already known issues in previous quarters (for example: analysts already knew Samsung (OTC:SSNLF) was coming out with a kids tablet), which should not have been taken into account when revising FY 2013 projections.

Guidance will be overly conservative and ambiguous.

This prediction is consistent with the consequences from the management team's overly aggressive projections for certain quarters between 2003 and 2004, when the company faced six different class action lawsuits, eventually reaching a settlement in 2008. Unfortunately, the LeapFrog management team swayed to the complete opposite end of the spectrum, eventually projecting ultra-conservative estimates that LeapFrog have beaten by an average of 34.59% over the past seven quarters.

The next trading session will be positive.

This prediction goes against actual results from five of the last seven quarters and is my most aggressive prediction.

Click to enlarge image.Click to enlarge

My prediction logic is basic. After Mattel (NASDAQ:MAT) reported dismal fourth-quarter performance with EPS of $1.07 vs. $1.19 expectations, analysts actually expect that LeapFrog will be closer to its projections than ever before, giving a more significant upside when the company beats by a large margin. Furthermore, the stock has plunged 14% since early November, creating an extremely favorable P/E ratio. The continued growth will make this stock even more undervalued.

Disclosure: I am long LF. 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.