LeapFrog Enterprises - Aggressive Growth

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LeapFrog Enterprises Inc. ( LF ) has delivered nine consecutive positive earnings surprises with an average beat of almost 21.9%. Given an increased guidance for 2012, strong earnings estimate revisions and an expected long-term earnings growth rate of 20.0%, this Zacks #2 Rank (Buy) educational toy maker looks like a solid growth pick.

Terrific Second Quarter

On August 1, LeapFrog reported a second quarter loss per share of 12 cents, narrower than the Zacks Consensus Estimate for a loss of 18 cents (a positive surprise of 33.3%). The loss improved from the year-ago loss per share of 21 cents. The strong results were driven by solid top-line growth.

Net sales escalated 31% year over year to $71.5 million, beating the Zacks Consensus Estimate of $66.0 million. Foreign exchange had an unfavorable impact of 1%. Revenue was mainly driven by strong content sales and higher demand for LeapPad.

LeapFrog experienced net revenue growth on a worldwide basis. In the U.S. segment, net revenue shot up 26%, while the international segment advanced 46%.

Gross profit expanded 50% to $29 million and gross margin expanded 500 basis points to 39.9%. The increase in gross margin was driven by strong sales volume, a favorable product mix and low products costs.

Upbeat Outlook

Based on healthy second-quarter results, management raised its earnings per share projection to between 61 cents and 66 cents from the previous expectation of 52 cents to 57 cents. Net sales are estimated to increase 13%-15%, up from the previous expectation of 10%-13%.

Earnings Estimates Climbing Higher

Over the past 60 days, the Zacks Consensus Estimate for 2012 increased 11.5% to 68 cents, implying a massive year-over-year growth of 125.0%. For 2013, the Zacks Consensus Estimate is 79 cents, reflecting an upswing of 3.9% and suggesting year-over-year improvement of about 17.0%.

Mixed Valuation

LeapFrog's valuation presents a mixed picture. On a price-to-book (P/B) basis, shares are trading at 2.18x, compared with the peer group average of 2.02x. Also, its trailing 12 months P/E of 14.86x is slightly above the peer group average of 14.47x.

However, on a forward P/E basis, shares trade at 12.77x, a discount to the peer group average of 13.12x. Also, the company has a price-to-sales (P/S) ratio of 0.99, a 10.8% discount to the peer group average of 1.11.

Moreover, the company has a trailing 12-month return on equity (ROE) of 17.5%, which is far above its peer group average of 2.5%. This implies that the company reinvests its earnings more efficiently than its peer group. It also has a PEG ratio of 0.64, which is less than 1, indicating that the stock is reasonably valued given the expected growth.

Chart Reveals Strength

Technical indicators show that LeapFrog has been trading above its 200-day moving average since November 2, 2011. Moreover, the stock's year-to-date return is roughly 54.2% compared with the S&P 500's return of 16.1%. Volume is fairly strong, averaging roughly 1229K daily.

Moreover, LeapFrog provides an attractive entry point for investors at the moment, as shares have moved a bit lower since Sep 10, when its competitor Toys "R" Us announced its plans to launch its own tablet computer for kids.

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 $579.1 million, LeapFrog primarily competes with Hasbro Inc. ( HAS ) and Mattel, Inc. ( MAT ).


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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