- LeapFrog is a leader in the educational industry.
- Currently, the stock is trading below $3.
- Based on its strong balance sheet, LeapFrog may be an interesting opportunity in the future.
LeapFrog (NYSE:LF) is an educational entertainment company based in California. The company has a strong brand and also a rich history of innovation. LeapFrog is recognized by its well-known LeapPad. For the last 20 years, the firm has gained substantial expertise in developing educational entertainment product.
A LeapPad 3
Back in 2012, the stock was trading around $10. Since then, the firm encountered many problems with the sale of its famous LeapPad. As a result, the stock is currently trading below $3. In my mind, the market overreacted. I also think that the market does not take into account its strong balance sheet.
In fact, LeapFrog is currently selling below its net current assets value (NCAV). In a previous article, I talked briefly about the NCAV. On the other hand, the present article is definitely a more in-depth discussion about the liquidation value of the firm.
This metric was created by professor Benjamin Graham. The net current assets value is calculated by subtracting the total liabilities from the current assets. In other words, it is the liquidation value of a company. Indeed, this metric attributes no value to fixed and intangible assets. Consequently, it is possible to buy buildings, machinery and brand for free. With $355 million in current assets and $97 million in total liabilities, LeapFrog has an NCAV of $258 million. Based on a share price of $2.80, the company has a market capitalization of approximately $196 million. Subsequently, it is possible to calculate a margin of safety of 24%.
Moreover, LeapFrog is almost a net net stock. In fact, a stock selling below its net net working capital (NNWC) is not only a cheap stock. Indeed, it is a dirt-cheap stock. NNWC is a close cousin to the NCAV. The difference is that the NNWC value reflects a rapid fire sale.
The NNWC formula
Consequently, the firm has an NNWC value of $142 million and a market capitalization of only $196 million. In fact, the NNWC value represents 73% of the market capitalization. It is important to remember that LeapFrog is a leader in the educational industry.
In conclusion, LeapFrog is selling 24% below its liquidation (NCAV) value and 38% higher than its fire sale value (NNWC). I agree that the company delivered weak performance in the last quarters, but the market clearly overreacted. Moreover, the stock remains very risky on the short term. Based on these positive aspects, I think that LeapFrog would be a great deep-value pick around $2. On the other side, please do your own due diligence before initiating a position in any stock mentioned.
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