Leapfrog Shares Jump: Why the Investor Demand?

| About: LeapFrog Enterprises (LF)

It was only a few days ago that Leapfrog Enterprises (NYSE:LF) (5.08) sent its shares jumping with a positive 4th quarter earnings report (see conference call transcript here). Yesterday, the company saw the momentum continue as it conducted an analyst day to provide further clarity on its toy business.

Investors liked what they saw as the stock hopped another 8% yesterday. Why the investor demand for a toy company during these difficult economic times?

I believe one reason that investors are coming back to LF is the commitment by management to return to profitability. As was pointed out in the analyst day presentation, the company saw adjusted EBITDA transform from a $93 million loss in 2006 to a $21 million gain in 2009.

LF is also expecting to be net cash positive in 2010, a far cry from the $145 million loss the company reported in 2006. A 30% reduction in operating expenses is a catalyst for the educational toy firm to see its bottom line improve, along with sales growth improving on its products from 20% in 2008 to 50% in 2010. Also, the company championed gross margins north of 45% and double digit operating margins as aiding LF in returning to profitability.

Management points to a strong start in 2010 as it reported very strong sale reorders late in the fourth quarter, which resulted in an increase in its receivable balances of almost $60 million year over year. By collecting these receivables in the first quarter of 2010, Leapfrog Enterprises expects cash to peak at around $100 to $105 million, which is about $10 to $15 million higher than the comparable period last year

The company will need this strong start in 2010 because management has already pointed out that this year will be challenging with the tough economic climate and continued unemployment seen in the U.S.

That said, I find the firm’s product mix and pipeline to be fresh and innovative. By focusing more on product integration through the Learning Path Connected Platform, the company will offer families the opportunity to evolve their educational play from traditional hand-held gadgets to the web. The web will allow the company to offer more original content and, with that, more revenue streams.

Couple this with LF’s vision of mobile computing and it becomes clear that the company is using technology to enable children and parents to gain a better educational and recreational experience.

The current market cap of $325 million may be a little steep as the U.S. is mired in an economic malaise, but LF is definitely one to put on the radar if it demonstrates some weakness during this economic downturn.

Disclosure: No positions held

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