Moms are the guiltiest consumers out there, worrying about kids' safety, health, and education. Companies seeking moms' strong purchasing power mistakenly believe that they are the easiest demographic to sell to. According to Marketing Profs they are the toughest consumer group to sell.
Marketing Profs explains that this is partly due to a miasma of low level guilt enveloping most moms -- am I doing enough for their education, etc. Also, the Millennial moms are the most tech-savvy and expect to research their purchases online. Toy companies are the most exposed to moms' purchasing decisions.
Who should benefit?
Of these LeapFrog Enterprises (UNKNOWN:LF.DL) should be best poised to profit. As an educational toy maker it already has the advantage of alleviating mom guilt. I say should because their new LeapPad Ultra, a $150 tablet that only allows access to LeapFrog's 800 proprietary games and LeapFrog vetted sites, was savaged in a recent BMO Capital downgrade.
BMO Capital thinks the Ultra is overhyped and won't be one of the must buys this holiday season.They cut their stock price target from $15 to $10. That sucker punched the stock, taking it down 7%.
The company's products have been awarded 80 National Parenting Center Seal of Approval distinctions, with six awarded this August, including one for the new LeapPad Ultra.Their products also assuage moms' fears about exposure to inappropriate content and time wasted on non-educational pursuits. The Ultra now offers Wi-Fi and safe peer to peer gaming.
Despite the downgrade, there's still a lot to like about LeapFrog: no debt, a large insider hold of 14%, return-on-equity of 35.67%, and a price to sales of .96. Naysayers abound with a 24.30%, and growing, short interest. However, insiders have been buying. Director Owen Rissman bought 25,000 shares at $9.10 on September 3.
This small cap, ~$602.30 million, compares favorably with much larger competitors Hasbro (NASDAQ:HAS), with a market cap of $6.10 billion, and Mattel (NASDAQ:MAT), with a market cap of $14.14 billion. Analysts give LeapFrog a 17.50% earnings-per-share growth rate, as opposed to Hasbro's 7.70% and Mattel's 7.95%.
Niche electronic learning toys that include e-readers and touch screen developmental toys have earned LeapFrog a trailing price-earnings-growth ratio of .77, lower than Hasbro's 2.10 and Mattel's 1.91. However, it's online word-of-mouth that attracts moms to buy, with 84% of moms checking online before they buy according to PunchTab 2013. And when moms search for LeapPad Ultra they get four star Amazon reviews and the site hottoysofchristmas.com, both recommending the device.
When Mom's not happy, ain't nobody happy
Investors should love LeapFrog's razor and blade model.The Ultra only comes with 11 apps preloaded; the 789 others available are sold separately. Music to investors' ears.
Its proprietary apps are downloadable. However, cartridges, although relatively pricey at $25, are still more convenient. LeapFrog CEO John Barbour said,"When mom is in Wal-Mart or Target, it's actually easier for her to pick up a cartridge and use it, than it is to go and download. Any time mom has to spend time being the head of IT at home, she's very unhappy." Come Christmas morning (or winter holiday of your choice) Mom does not want to be downloading apps for antsy children.
Toy industry competition is fierce. As the Mattel 10-K notes, competitors also include VTech, Lego, and Bandai, which also make educational toys. Even Amazon has got into the act with a kid-friendly Free Time control for the Kindle Fire, although by no means is it an educational toy.
More mature companies Mattel and Hasbro both pay large dividends, 3.40% and 3.50% respectively, for those who might be scared of a more volatile and growing company like LeapFrog. This is the time to buy toy companies as Fellow Fool Rick Munarriz attests if you are looking for upside, as the holiday season accounts for the majority of toy purchases.
Last year LeapFrog took four of the top ten selling toy places, including number one, with Mattel only taking three spots and Hasbro two according to The NPD Group. Sun Trust Bank analyst Michael Swartz fully believes that the Ultra will be one of the hottest toys this season, because he says it is getting support from big box retailers Wal-Mart and Target.
There is still risk to the downside with LeapFrog. Although it reported a 16% increase in net sales in the second quarter (not including Ultra) in what is typically a weaker quarter for toy companies, rival Hasbro is partnering up with several companies like Dreamworks, Zynga, Disney, Electronic Arts, and others to bolster its digital platform. Hasbro's Beyblade Metal Fusion toy earned number two spot on 2012's top selling toy list.
Meanwhile, Mattel's very popular American Girl doll franchise has been the savior of the company, offsetting weakness in Barbie sales quarter after quarter.Last holiday season, those aforementioned top selling Mattel spots were from the evergreen Hot Wheels and Monster High, a new addition to the Mattel lineup.
Mother's little helper
Frankly, I think all three will prosper this holiday season, but Mom may feel torn between buying the educational toy and the "I want that!" toy. Here's hoping for LeapFrog shareholders that she does the right thing, even as CFO Ray Arthur said on the second quarter call, " We remain cautious on the overall consumer environment."
LeapFrog is a mother's darling because not only does it keep the tots safe from online stranger danger and inappropriate content, it also teaches and keeps the little ones entertained. LeapFrog will make investors even happier with its razor and blade business model, insider buying, and 16.20% net margin.
Mattel and Hasbro are worthy stocks, but their upside will be more limited, although both have sustainable yield.
AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends LeapFrog Enterprises. The Motley Fool owns shares of LeapFrog Enterprises. 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.