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Hi guys, I'm an individual investor working within a value investment framework with a long term investment horizon. That being said, I'm always looking for shorter term special situations as well. I think the markets provide opportunity for outsize profit, and I remain unconvinced of the... More
  • LeapFrog  0 comments
    Aug 2, 2010 12:18 PM | about stocks: LF

    Leapfrog is a very interesting long term story.

    The quick version follows.

    Looking over the last few years, revenue has been steadily decreasing. At the same time, operating expenses have also been decreasing. If one were to plot those two sets of data points onto a graph you will notice that operating expenses are falling faster than revenue. The hypothesis is that the operating costs line will cross below the revenue line and LF will be in the black.

    From a qualitative perspective,

    The difficulty for LeapFrog has always been, from a product perspective, that junior would rather play with his GameBoy then with a "lame," learning device. This is endemic to learning toys - this is their eternal downfall. Kids learn all day in school, so for them to relax and play Gameboy as opposed to watered-down learning "fun" is not surprising.

    The challenge for LeapFrog will be to maintain their niche while increasing the enjoyment factor of their products. Looking internally, the company has been bringing in management with an eye on just that. Additionally, they are finding ways to expand their product portfolio, market directly to the consumer, maintain shelf space at Best Buy and also sell through online retailers such as Amazon.

    One of the great strengths of LeapFrog is their balance sheet: clean and free of debt burden. This is a huge boon.

    If and when LeapFrog can become cash flow positive - and according to my analysis of the long term trends this can occur regardless of any "turn around" - it will become an interesting buyout target/ bolt-on acquisition for one of the larger toy houses.

    Finally, you may notice that Michael Milken of junk bond infamy is one of the largest individual shareholders. Putting my money where his mouth is doesn't seem like the worst idea, especially since his personal fortune is enough to take the company private several times over.

    Disclosure: Long LF

    Stocks: LF
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  • I have been adding LF on the way down. There's a long term trend of their costs falling faster than their revenue.
    Aug 2, 2010
  • Leapfrog keeps getting cheaper, all we'll need now is a downgrade - it'll become a great acquisition or show y/y beats on EZ comps
    Jul 27, 2010
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    Jul 23, 2010
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