LeapFrog Enterprises Inc. (LF) Richie Hartz, Patrick O’Donnell, Matthew Rasinski Tuesday, April 2 nd 2013
Agenda Introduction Company Overview Industry Overview Stock Performance Financial Analysis Valuation Recommendation
Introduction LeapFrog trades on the NYSE with ticker symbol LF Company was founded in 1995 by Micheal Wood and Robert Lally and headquartered in Emeryville, California USA Focus: educational entertainment Concept was originally designed to educate Wood’s son through toys
Company Overview LeapFrog - designs, develops, and markets technology-based products for the purpose of education Demographics – infants through 9 years of age Focus on math, reading, writing, science, social studies, creativity, life skills, and foreign languages In 1995, with the aid of Stanford University Professor Dr. Robert Calfee, LeapFrog developed their first toy called the LeapFrog Phonics Desk (at a of price $50). In 2013, the firms top product is the Disney Princess Bundle – a tablet complete with “Disney” apps (price $130)
Product Overview Learning games, apps, eBooks, videos, music, toys, and more Currently sell 2 versions of LeapPads, 2 hand held computers (GS and the Explorer), 2 sets of eBooks (Tag and the Tag Junior), learning toys, and iPhone and iPad apps LeapPads -- $120 GS and Explorer -- $70 eBooks -- $25 to $170 bundles Toys -- $10 to $25 Apps -- $0.99
LeapFrog Products
Recent News Leapfrog has won over 80 awards from the Parent’s Choice Foundation As of 2013 – The new management team has shifted their emphasis from toy development to educational entertainment Leapfrog has sold more than 100 million books, over 100 million educational toys and over 55 million tablet and gaming platforms.
Transition Period Toy Development Educational Entertainment Transition by Management Changes the target market from infant to grade-schooler Addition rather then a substitute to current product line
2013 Outlook New product launches include: Learn-to-read system iPhone and iPad apps New version of LeapPad tablet Global distribution networks Including 4 interactive languages Growth Strategy: long term investments in content, international expansion, online communities, systems, and new platforms
Utilize FIFO inventory recognition Emerville, California – Headquarters and Operations Type of possession: Lease Fontana, California – Distribution Center Type of possession: Lease Income tax benefits 2012 – ($24,504,000) & 2011 – ($1,137,000) Due to the recognition of previously unrecognized tax carryforwards Accounting
Manufacturing Designed to maximize the use of outsourced services With respect to physical production and distribution Highly seasonal business Manufacturers are located in Asia, primarily in China Top three vendors supplied 73%, 65%, and 57% of LeapFrog’s products in 2012, 2011, and 2010 respectively Largest manufacturers are: Wynnewood Corp. Ltd. & WKK Technology Limited They are billed by manufacturers in US dollars
Operations Develop products primarily in the United States Marketing efforts are centered on North America Lesser extent to Europe and the rest of the world Foreign currency transactions are hedged through short term futures contracts
EBIT Breakdown by Region However, his does not explain the entire picture
LeapFrog k Report EBIT in terms of United States has grown exponentially since 2010 A similar expansion strategy into the foreign market place would lead to enormous economies of scale United States Foreign Figures are in thousands
Domestic Sales The big three US retailers: Wal-Mart, Toys “R” Us, and Target have historically accounted for a substantial portion of gross sales
Equity Snapshot Stock Price: $8.33 Beta: 1.26 TTM P/E: 6.72 Forward P/E: PEG Ratio (5 year): 0.67 Price/Book: 1.76 Source:
Stock Performance Source: Hasbro Inc. (HAS) Mattel Inc. (MAT)
Industry Overview Hasbro Inc. Mattel Inc. Source
Porters 5 Force Analysis Bargaining Power of Buyers: Moderate Evidence: high profit margins exist Niche market, little direct competiton Bargaining Power of Suppliers: Moderate Computer components and assembly have become commodities Competitive advantage lies in the programming, not the physical interface They have 3 main manufacturers Threat of New Substitutes: High Classic teaching methods still dominate the educational market Apple and Samsung tablets can offer “learning” apps that mimic those offered by Leapfrog.
5 Force Analysis Continued Competitive Rivalry within the Industry: Moderate There is no definitive market dominance Educational Technology for individual users is a relatively new industry (use of the “pad”) Threat of New Entrants: High App market is vast and easy to gain market presence Brand loyalty has yet to be established – users “children” unable to recognize the difference between a Leapfrog product and an Apple Product.
Macroeconomic Condition Consumer confidence has shown slow signs of improvement Source:
SPDR – XLY Performance Consumer Discretionary Select Sector Consistent growth in discretionary spending over the 2y Source:
th Quarter Highlights Highlights of full year 2012 results compared to full year 2011 results: Consolidated net sales were up 28%. U.S. segment net sales were up 24%, and international segment net sales were up 38%. Income from operations was up 170%. Income from operations as a percentage of net sales was 11.0%, more than double the prior year. Net income was $86.5 million, up 334%. Adjusted EBITDA was $93.1 million, up 89%. Cash and cash equivalents were $120.0 million as of December 31, 2012, up 67% compared to the balance as of December 31, 2011.
WHAT is Bringing in the Money? According to management (2012 Annual Report): -”LeapPad” – one of the generally more expensive items. -“App” sales for iPhone and iPad In general, sales are increasing for the technology products, however the less technology intensive projects have greater margins.
Revenue/Cost Tradeoffs Overall Retail Inventory Levels have increased since 2010 Sales increased by 5% while Cost of Goods increased by 6% (as a reflection of the proportionally higher sales of higher cost platforms “pads”) Decreased Marketing expenditures to offset increased COGS (of technology products) and Operating expenditures.
WHEN is the Money Coming in? According to 2012 Annual Report: Quarterly Cash Flow
Revenue Cost/Tradeoffs
Financial Analysis - Recent Growth Consistent Expansion in Price and Volume Components 432, , ,288 Suggests that LeapFrog is still in a growth stage Net Sales (in thousands, USD)
Valuation DCF Suggests 20% Upside
Valuation - Sensitivity
Valuation Comparable Analysis -Trailing versus forward P/E
Decision Drivers GICS Application Clear Management Goals Discounted Cash Flow Comparable Analysis
Recommendation Buy 2000 Shares at the Current Market Price Current Stock Price of $8.20 Order total: $16,400