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Editor at Soberstocks.com, has made contributions to professional healthcare magazines in the past. Currently working as a healthcare professional, but has past experience in investments. Will be posting articles written and published on Soberstocks.com by Sam Mitchell. I am looking to promote... More
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  • LeapFrog: Great Upside, Limited Downside 2 comments
    Jan 2, 2014 1:52 AM | about stocks: LF

    From the Soberstocks.com blog by Sam Mitchell:

    LeapFrog Enterprises (NYSE:LF) is the perennial leader in educational tablets for children and holds a vast library of entertaining educational products. LeapFrog has significant upside after a recent selloff of the underpriced stock created an even greater bargain. The company has solid fundamentals, currently holding 15% of it's market cap in cash with no debt and a return on equity of 35%. The company is a favorite among children and parents, who appreciate high-quality educational products that keep their kids engaged.

    Limited Downside:

    Any possibility of loss in an investment must be just as important to the "intelligent" investor as the potential gains. In the case of LeapFrog, the upside far outweighs the downside. A disappointing holiday season is overly priced into the educational toy company as shown by the significant decline in share price over the past several months. Management announced they expected the holiday sales environment to be challenging and lowered their guidance for the quarter. Yet the cheap valuation of LeapFrog creates a solid floor for the stock price as the ratios do not imply any growth. However, the company does have prospects for a bright future.

    One concern of investors, as seen here on Reuters, is that LeapFrog has increased competition in low-priced tablets with abundant educational apps looking to dig into LeapFrog's customer base. Despite rising competition, no company currently offers the high-quality and large library of engaging entertaining educational products of LeapFrog. None of the competitors offer the quality of educational products that parents expect and look for in LeapFrog's products.

    Great Upside:

    The company has very low valuation ratios (see table below) hinting to the upside potential in LeapFrog's stock. Demonstrating the quality and strength of their core product in the children's tablet market, management noted on their latest earnings call, "According to NPD, more LeapPad kid tablets have been purchased lifetime to date by consumers in the U.S. than nearly all of our kid tablet competitors combined and more have been bought this year through the end of Q3 than any of the manufacturers' kid tablets." The sell-side is also forecasting annual EPS growth of 17.5% per annum for the next five years! This is a unique opportunity to buy a market leader in a solid growth market for the cheap price of EV/EBITDA ~5, and in healthy financial condition.

    Current year P/E minus cash


    Forward P/E minus cash








    LeapFrog's comparable EPS growth is misleading due to it's use of tax deductibles on EPS, creating EBITDA as a more accurate assessment. As the chart below clearly shows, LeapFrog has been growing its business significantly over the last few years. Also due to their leading position in the market, they will continue to so in the future. Yet, their valuation is close to the lowest it has been in terms of EV/EBITDA in the last 52 weeks. The solid future of LeapFrog as a leading educational entertainment company, plus growth and great fundamentals, does not match the low valuation currently being given by the market. A modest valuation of LeapFrog would be a EV/EBITDA of 8, representing at least 32% upside. As growth resumes at a faster pace and competition is shrugged off the multiple could expand even further, creating additional upside potential.

    LF EBITDA (Annual) data by YCharts

    LF EV to EBITDA (NYSE:TTM) data by YCharts

    However, the upside does not stop there. As recognized in this articleon SA from another contributor, LF has 70 million in Net Operating Carry Forwards, allowing them tax relief on future income. This a significant asset, not recognized in the book value, as pointed out by the SA contributor. These NOLs will allow the company to achieve great EPS results when used, as shown by a .9 EPS last year, when no tax expense was recorded! This years EPS is expected to come in at ~.4 without tax relief but when taking into account a normal tax rate for 2012, it is actually growth over last year. This example shows the huge value of the asset of 70 million in NOLs for a 500 million company.

    International sales have also been growing at a fast pace, 16 percent yoy in the last quarter. Currently, international sales make up only 28 percent of overall revenues. But this shows the opportunity for further growth of international sales and a larger impact on the top and bottom line.

    One statistic I look at when first researching a company is the short float, realizing that a good company with a large % short can amplify gains. LeapFrog perfectly fits that description, a well positioned company, selling cheap with a short float of 34%. After the fairly recent decline in stock price, and gains booked by shorts, I expect that any favorable news will help to get shorts out and propel the price upwards. This is an added benefit to the original investment thesis.


    There are no foreseeable catalysts in the future. While near term catalysts are nice, they are not important in the long term. Good events tend to happen for quality undervalued companies in regard to catalysts. However, when competitors fail to take away material sales and profits from LeapFrog, the market will be more inclined to recognize the company's full value. Other catalysts may include a buyout, increased investor recognition, or utilization of LeapFrog's cash hoard. A stock buyback or acquisition could serve as catalysts to move shorts out and help recognize the company's full intrinsic value.


    LeapFrog is a great investment opportunity with limited downside and many reasons for upside. The market is currently mispricing the company at an unjustified low valuation for a market leader with growth potential and great fundamentals.

    P.S. Please check out Soberstocks.com for more articles by Sam Mitchell!

    Disclosure: I am long LF, .

    Business relationship disclosure: I am the editor for Soberstocks.com, where this article was written by Sam Mitchell.

    Stocks: LF
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Comments (2)
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  • MrMatt
    , contributor
    Comments (1395) | Send Message
    Was at Walmart on the weekend, the Leapfrog shelf was bare, save for a few fully stocked titles.


    I saw a parent, mentioned it was looking sparse. She said that they are sold out everywhere. Sounds promising to me.
    6 Jan 2014, 09:32 AM Reply Like
  • DianaRoberts
    , contributor
    Comment (1) | Send Message
    Author’s reply » Thanks Matt that is nice to hear. I also think their products are very popular and well liked. The market seems to think competition is keeping all of LeapFrog's product on the shelves, yet as you pointed out they are still hot items. Hopefully this becomes evident in their next earnings report.
    6 Jan 2014, 05:09 PM Reply Like
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