The Numbers
LeapFrog’s niche strategy and recent success under new management is laudable, but for investors it becomes more compelling when you consider company performance in light of the valuation. Prior to Mr. Barbour’s arrival, cash management and inventory were concerns plaguing LeapFrog. At year-end 2012, the company’s cash balance was $120 million (67% increase YOY), which does not include receivables (which together equal $190 million). Management has also streamlined inventory management. In fact, the concern by one major vendor was that the company might have left sales on the table by not making enough-a good problem to have. With a $120 million in cash and net global sales of $581 million, and a market cap of $623 million, Leapfrog is trading at 1.07 times sales, and with a per share price of $9, it is trading at just over 6 times cash flow with a .35 peg ratio. To put it mildly, it is dirt cheap, and like the late Rodney Dangerfield, it gets no respect!
Gross profit for the year was 42.1%, or $245 million, an improvement of 32% year over year, driven by higher sales and proportionally lower discounts. While operating expenses were up 11%, as a percentage of net sales they dropped 460 basis points, which accounts for the lowest percentage amount since LeapFrog became a public company. LeapFrog is delivering on the bottom line as well, with a 170% increase operating income, and a 300% increase in net income in 2012.
Get it while it (is not) hot
Many investors seem to think recent performance is an aberration and unsustainable. It is not only trading at historic lows in deference to performance, but it also has a 15.86% short interest in the shares outstanding.
For 2013, Leapfrog plans to strengthen its ecosystem and bring new products on the market, including a new learn-to-read system, a new iPhone/iPad App product, and a new series of LeapPad Tablets. They also plan to continue their international expansion, invest in R & D, and create a closer relationship with customers through an online community for parents. Management forecasts that they will be able to make these investments while keeping the strong operating margin the company enjoyed in 2012.
I initiated a small position in this company in Spring 2012, and since then the price has meandered, while the company has continued to beat expectations, and the stock has become increasingly cheaper. In the meantime, I (and LF’s management) have been buying shares on weakness. I invested because I see a bright future for LeapFrog as an independent company, but if this market dislocation continues, I believe Mattel or Hasbro will also see it as an opportunity and buy LeapFrog, capturing one of the fastest segments of the toy market, and simultaneously gaining a competitive advantage over the other.
The article Make Your Portfolio Leap (Frog)! originally appeared on Fool.com and is written by James Fantaci.
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