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  • LeapFrog Enterprises Inc. (LF) Buyout Strategy 0 comments
    Jun 22, 2014 9:21 PM | about stocks: LF

    LeapFrog creates educational entertainment for young children. The company has created a learning platform with supporting content and toys. The main product they sell is the LeapPad learning tablet. Furthermore, they maintain the Leapster multimedia learning platforms and Tag reading systems along with an App Center to support the LeapPad. Using this platform, LeapFrog helps children learn to read, write and do math.

    Technology is enabling personalized teaching of children. Instead of having a standard curriculum, an instructor has the ability to teach their student at a different pace using tools such as the LeapPad. However, devices like the iPad have the ability to disrupt LeapFrog ability to successful sell the LeapPad. As a result, LeapFrog's true value is derived from its learning platform and strong balance sheet. Compared to related competitors such as Mattel, LeapFrog is an underpriced equity with the potential to grow substantially with the right vision

    We believe LeapFrog has the ability to regain its foothold within the education technology sector if they make key changes to their operations. With the LeapPad, the firm has no chance of outcompeting similar tablets because of the one dimensionality of the LeapPad. As a result, parents are less likely to purchase this device compared to things such as the iPad and Kindle Fire. LeapFrog is an ideal candidate for a buyout due to its strong balance sheet, lack of vision, and massive potential. With over 50% of the float not owned by insiders, the company would be a relatively easy target for an LBO. Despite the company's lack of success with the LeapPad, the company still produces high quality educational content. We argue that this content is the source of LeapFrog's true value because it creates a platform that people actually want to use. Also, this content platform can be spread to several devices rather than one, the LeapPad.

    For the buyout to be successful, management needs to be convinced that the future of the company lies in its ability to create high quality educational content rather than focusing on lower margin hardware selling. The CEO, John Barbour, was previously an executive at Toys "R" Us, and as a result he may be a reason why LeapFrog has stuck to the LeapPad for so long. Therefore, there may need to be shuffling of top-level management within the firm along with a new outlook about the company's future.

    LeapFrog is an attractive buyout target because its balance sheet allows the company to be leveraged to generate returns for investors along with refocusing the company on the most important objectives for success. With a current ratio above 5 and cash and cash equivalents around one-third of market capitalization, the company is well positioned for an LBO. Despite decreasing market share and increasing marketing costs, the company has had consistent earnings over the last 5 years. Moreover, the company has gross margins above 35%, much greater than similar competitors. With a strong balanced sheet coupled with the potential for more growth, LeapFrog is a very attractive target for a buyout.

    Disclosure: The author is long LF.

    Stocks: LF
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