LeapFrog Falls Off Lily Pad

In the time it takes to say "Hi, I'm Lily!" LeapFrog Enterprises (NYSE: LF  ) became the third-largest toy maker in the country, trailing only Motley Fool Stock Advisor recommendation Hasbro (NYSE: HAS  ) and Mattel (NYSE: MAT  ) .

The stock's trajectory had likewise been straight up, soaring 300% since a mid-2002 IPO. Then, yesterday, the company missed analyst estimates for its third quarter, and the stock plunged more than 25%.

For the quarter, LeapFrog earned $33.4 million, or 55 cents a share, on top-line sales of $203.9 million. This was up from $26.7 million, or 50 cents a share, on revenue of $182.1 million for the same quarter last year. Sounds great, but analysts had been looking for about 61 cents a share and revenue of $236 million. Oops.

In today's conference call, which I accessed through CCBN, CEO Mike Wood called the miss an issue of timing and predicted that "those sales not recognized in the third quarter will be recognized in the fourth quarter," and thus raised guidance for the next, most important quarter of the year. Apparently, the stock market wasn't buying.

In the spirit of disclosure, my household must have five different LeapFrog toys lying around -- and we don't even have kids (rim shot). Our kids adore the stuff. So, when I realized LeapFrog was publicly traded, I was interested. Sadly, its stock price seemed to assume that for years the company would have the "It" toy for the Christmas season. In the fickle toy environment, this isn't a good bet, though I'd be willing to make it with LeapFrog before I would any other.

Such assumptions assure that when a company has a quarter like this -- even if the results are substantially better than in previous quarters -- the stock gets mauled. That's precisely what happened here. LeapFrog's third-quarter cash flows (yay for the company for releasing them with earnings) always look depressed because, like every toy manufacturer with a lick of sense, the company gears up for the big shopping season.

The future looks bright with continued hot sales of the LeapPad and other lines, but as long as the stock prices the company for perfection in an imperfect world, there will be days like this. LeapFrog's company motto is "Learn something new every day!" Today, investors learned for the first time that LeapFrog's stock can go down.