Why LeapFrog Shares Got Left Behind

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 LeapFrog Enterprises (NYSE: LF  ) were getting passed over by investors today, falling as much as 11% after the company released underwhelming guidance in its second-quarter earnings report.

So what: Sales for the toymaker were actually impressive for the quarter, jumping 16% to $83 million, way ahead of estimates at $77.2 million. Earnings per share also beat the experts' view, coming in at a $0.04-per-share loss during the seasonally weak quarter, versus the $0.08 loss expected. Sales grew by double digits in all segments for LeapFrog, which also rolled the LeapPad Ultra last quarter, which it calls the ultimate kids' learning tablet. Still, Wall Street was turned off by weak guidance, as management predicted Q3 EPS of $0.32 against expectations of $0.34 and full-year EPS of $0.57-$0.60 compared to the $0.64 seen by the experts.

Now what: I wouldn't put too much stock in LeapFrog's guidance, as the company has been consistently conservative with its projections, and in each of the last four quarters, it has topped analyst estimates by more than 20%. It's worth remembering that the second half is the key for LeapFrog, as the toymaker derives about three-quarters of its sales from the last six months of the year during the all-important back-to-school and holiday-shopping seasons. Keep an eye on sales of new products such as the LeapPad Ultra, as that will tell if management is making smart long-term investments.

LeapFrog's strategy of carving out a small niche in the tablet world may be a clever one. With its focus on children's education, it can avoid the cutthroat competition among the tech heavyweights. But that doesn't mean you should avoid investing in the big boys. Find out "Who Will Win the War Between the 5 Biggest Tech Stocks?" in The Motley Fool's latest free report, which details the knock-down, drag-out battle being waged by the five kings of tech. Click here to keep reading.



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  • Report this Comment On August 05, 2013, at 12:10 PM, mutantgeezer wrote:

    I think everyone is looking in the wrong direction. LF isn't really a toy maker, they're actually a software company. I believe they will be bought out by a major toy maker such as Mattel or Hasbro which would fill a void by providing software for technology toys they already make or are planning to introduce. In this economy people think twice before giving their 5 year an Ipad but a $150 kid's learning tool in imminently affordable. I just bought 500 shares hoping for a buyout. If it drops again, I'll buy more.

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