Why LeapFrog Shares Sank

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What:  Shares of childhood education specialist LeapFrog (NYSE: LF  ) were getting held back by investors today, falling as much as 12% despite a strong third-quarter earnings report.

So what: Leapfrog stock opened the day higher but quickly fell into negative territory. Sales for the quarter increased 28%, while EPS jumped 71% to $0.60. The maker of tablets and other electronic children's devices raised its full-year sales guidance to a range of $535 million to $550 million, an increase of about 20% from last year, and its EPS outlook to a range of $0.75 to $0.81 cents, up 150% from 2011. The company also announced that it will continue its partnership with Lions Gate Entertainment (NYSE: LGF  ) to distribute four animated films on DVD starting in 2014.

Now what: The market reaction is certainly puzzling here. Analysts were expecting a profit of just $0.42 per share in the all-important back-to-school quarter but may have been disappointed that the company didn't raise its guidance higher, considering the earnings beat. Wall Street is projecting a $0.51 EPS in the fourth quarter, which would equal an $0.85-per-share profit for the year. Management could be giving a lowball estimate here, though, as it's increasing advertising expenditures 20% to 25% for the holiday shopping season in an effort to ramp up sales, explaining, "Our results for the year will ultimately depend on holiday sell-through of our products." At a P/E of just 12 after today's sell-off, shares look mighty cheap, and a blowout holiday quarter could be in store. This could be a great time to get in.

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  • Report this Comment On November 12, 2012, at 12:18 PM, Compson wrote:

    Although LeapFrog has an image and reputation appealing to parents seeking toys that are well-built, fun and educational, the company is neither flawless in terms of design and execution nor immune from consumer whimsy.

    The iPad has been on the market little over than 3 years, yet in late 2012 the tablet market itself has reached saturation levels, especially with the "me too" additions from Google, Samsung and Microsoft at low-ball prices. And besides the apparent peaking of the popular device, LeapFrog may be confronting increasing skepticism from potential customers who have suddenly become either : 1. disillusioned by the keyboard-less tablet and the value of its apps, many easily proven over-hyped and/or overpriced; 2. reluctant to purchase for their child a tablet that's merely half the price of a wi-fi version they can't afford for themselves. Add to this the price of the LeapPad's apps and accessories, and the speculative nature of LeapFrog shares becomes all too apparent.

    Will the company "sell" enough parents on a weak replica of a now-"common" product? Or will the company be required to introduce deep, profit-eating price cuts to move these costly "toy tablets" off the shelves?

    Perhaps giveaway prices will be tried in an attempt to realize a return on the tablet's apps and accessories. On the other hand, that may be too much to hope for, as evidenced by the stock's recent slide. In any case, LeapFrog is definitely of an increasingly speculative nature now that the smart money appears to be betting on even lower prices for Apple's already severely damaged share price.

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