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LeapFrog Enterprises

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LeapFrog Enterprises Inc. (LF) has put together 10 straight quarters of positive earnings surprises, raised its outlook for 2012 and has watched earnings estimates jump in the past 7 days. In addition to all this, its relatively low valuation multiples make this Zacks #1 Rank (Strong Buy) educational toy maker a true value stock.

Solid Q3 Results

On November 5, LeapFrog reported third quarter earnings of 51 cents per share, breezing past the Zacks Consensus Estimate by 24.4% and last year’s earnings by 71%.

Net revenue jumped 28% year over year to $193.1 million, also comfortably surpassed the Zacks Consensus Estimate of $174 million. Revenue was mainly driven by a surge in demand for the LeapPad hardware platform and the introduction of new products like LeapPad2, LeapsterGS and the Touch Magic toy line.

LeapFrog also experienced net revenue growth on a worldwide basis. In the U.S. segment, net revenue advanced 26% to $116 million. While in the international segment, net revenue shot up 36% to $34.9 million. Gross profit expanded 25% year over year to $77 million.

Impressive Outlook

Based on strong third-quarter results, retail point of sale trends and its inventory position, management raised the outlook for 2012. The company now expects earnings per share between 75 cents and 81 cents, up from the previous expectation of 61 cents to 66 cents. Net sales are estimated to increase 18%–21%, compared with the previous expectation of 13%–15%.

Guidance Drives Estimates

In the past 7 days, the Zacks Consensus Estimate for 2012 surged 20.6% to 82 cents per share as all 6 estimates moved higher. The current estimate implies a robust year-over-year increase of 174.4%.

For 2013, the Zacks Consensus Estimate advanced 7.6% to 85 cents over the same time frame, aided by 5 upward revisions out of 7 estimates. The current estimate suggests year-over-year growth of 3.4%.

Attractive Valuation

LeapFrog has low P/E and P/B multiples of 10.1 and 1.8, respectively. It also has an attractive P/S of 0.9 (a P/E ratio under 15.0, a P/S ratio less than 1.0 and a P/B ratio below 3.0 generally indicate value). Volume is fairly strong, averaging roughly 1,522K daily.

The return on equity (ROE) also looks attractive. It has a trailing 12-month ROE of 21.4%, compared with the peer group average of 2.8%. It also has a PEG ratio of 0.52, which is less than one and indicates that the stock is reasonably valued given the expected growth rate of 19.5%.

Based in Emeryville, California and founded in 1995, LeapFrog is a leading designer, developer and marketer of innovative, technology-based educational products and related proprietary content, dedicated to making learning effective and engaging. With a market capitalization of $560.6 million, LeapFrog primarily competes with Hasbro Inc. (HAS) and Mattel, Inc. (MAT).

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