This Toy Company Belongs in Your Shopping Cart

With more than 5,400 stocks to choose from, the universe of investment possibilities is enormous. You could get tips over the company water cooler or from Internet discussion boards. A better way might be to look for stocks based on what you already know and own.

Motley Fool CAPS helps you focus your energies by providing you with a personalized Stock of the Day. Using its supercomputer, it looks at stocks currently in your active pick list, stocks picked by highly rated players with lists similar to yours, industries in which you currently have active picks, and targets areas in which you already have an interest.

By pairing up the opinions of some of the top investors in the CAPS community, CAPS provides you with a handful of companies on which to begin your own due diligence and research.

Buy what you know
No doubt based on my interest in the leisure equipment and products sector, where I've rated toy company JAKKS Pacific (Nasdaq: JAKK  ) to outperform the broad indexes, the CAPS supercomputer thought I also might be interested in another playmate, this time LeapFrog (NYSE: LF  ) . It was one of five Stocks of the Day it offered up for my consideration this week.

As we move into the toy industry's all-important Christmas selling season, let's see what LeapFrog has going for it that might warrant an investment, even if the supercomputer hasn't yet picked it for you. Just remember, as smart as the CAPS algorithm may be, it's still just an algorithm, so be sure to look before you leap on any of its suggestions.

LeapFrog snapshot

Industry

Leisure equipment and products

Sector

Consumer discretionary

Market Cap

$574 million

Revenues (TTM)

$505 million

1-Year Stock Return

139.9%

Return on Investment

18.1%

Estimated 5-Year EPS Growth

20%

Dividend & Yield

N/A

Recent Price

$8.54

CAPS Rating (out of 5)

****

Source: FinViz.com. TTM = trailing 12 months. N/A = not applicable; LF does not pay a dividend.

Leaping to the fore
You won't mistake the new LeapPad 2 from LeapFrog for an iPad killer, but that's not the market it's targeting. Based in large part on the success of the tablet's introduction last year, the educational toy company has put on quite a show for investors, at one point hitting $12 a share, or nearly 50% higher than where it currently trades.

Yet even after those gains, the toy maker still looks cheap on both a relative and absolute basis. JAKKS, Mattel (Nasdaq: MAT  ) , and Hasbro (Nasdaq: HAS  ) go off at average forward multiples 28% above LeapFrog while the toy maker's valuation stands around three-quarters of growth estimates.

From a frog to a king
Analysts estimate we're going to see LeapFrog grow earnings at an average rate of 20% over the next five years; if we apply that to last year's EPS of $0.30 per share, the company should finish out 2017 with $0.75 in per-share profits. But is that plausible?

Over the last five years it lost money in 2008 and 2009, although thanks to its breakout hit last year it's been growing by leaps and bounds more recently. Still, new competition from Toys R Us, which introduced its own tablet into the kids market, is expected to offer users a more robust experience than the LeapPad. But the Tabeo's web-surfing capabilities might not be a deal-buster since parents may want to shield their toddlers from the full frontal assault of the web, even though the Tabeo offers parental controls.

And there are other kid-oriented tablets on the market, too, including the InnoTab, Kurio 7, Lexibook, and Meep, though none has gained the following of the LeapPad. Amazon.com (Nasdaq: AMZN  )  is introducing a line of inexpensive tablets, and someday we might just see the iPad Mini from Apple (Nasdaq: AAPL  ) .

Analysts still think enough of LeapFrog's chances that they actually worried it might not have enough inventory to meet demand. Pre-orders were sold out immediately after the LeapPad 2's release, playing into the stock's tumble after it reported a solid quarter and raised full-year expectations. So Toys R Us shouldn't feel too confident it'll be able to steal share, particularly when it's facing a patent infringement lawsuit over its Tabeo .

A toy story
Obviously, LeapFrog is more than just its Toy of the Year, as the full breadth of toys generated $210 million in sales in the fourth quarter, 46% of its total yearly sales, a typical haul for toy makers at that time of the year. Analysts, though, are only looking for a 6% increase in full-year sales, which seems pretty tame considering management is expecting a 13% to 15% increase.

I'll be rating LeapFrog to outperform the market indexes on CAPS as Christmas sales are likely to be robust and its discounted valuation should enable it to score some impressive gains. But tell me in the comments box below if you agree that it can turn the tables on the competition vying for its position.

No buzz kill here
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Rich Duprey owns shares of Apple and Hasbro. The Motley Fool owns shares of Apple, Amazon.com, Hasbro, and Mattel. Motley Fool newsletter services recommend Amazon.com, Apple, Hasbro, LeapFrog Enterprises, and Mattel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 12, 2012, at 5:49 PM, johnb688 wrote:

    LF has been beaten down lately over competition worries, however, the comparable tablets are either more expensive or less capable. Their target age range is 3-9. A parent I would not get a a tablet for a 3-9 year old that wasn't build for a child. Anyone wild about their kid throwing an IPad in their toy box? LeapFrog has more apps that are more readily available than their competitors. They also have a cartoon series on Netflix. This company is more diversified that it gets credit for. Bonus point: Michael Milken and Oracle CEO Larry Ellison own controlling interests. These guys didn't make their extraordinary wealth by making bad investments.

    Trade what you know,

    Parent of a 3 year old

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