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LeapFrog Enterprises Inc. (LF) Richie Hartz, Patrick O ’ Donnell, Matthew Rasinski. Tuesday, April 2 nd 2013. Agenda. Introduction Company Overview Industry Overview Stock Performance Financial Analysis Valuation Recommendation. Introduction.
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LeapFrog Enterprises Inc. (LF)Richie Hartz, Patrick O’Donnell, Matthew Rasinski Tuesday, April 2nd 2013
Agenda • Introduction • Company Overview • Industry Overview • Stock Performance • Financial Analysis • Valuation • Recommendation
Introduction • LeapFrog trades on the NYSE with ticker symbol LF • Company was founded in 1995 by Micheal Wood and Robert Lally and headquartered in Emeryville, California USA • Focus: educational entertainment • Concept was originally designed to educate Wood’s son through toys
Company Overview • LeapFrog - designs, develops, and markets technology-based products for the purpose of education • Demographics – infants through 9 years of age • Focus on math, reading, writing, science, social studies, creativity, life skills, and foreign languages • In 1995, with the aid of Stanford University Professor Dr. Robert Calfee, LeapFrog developed their first toy called the LeapFrog Phonics Desk (at a of price $50). • In 2013, the firms top product is the Disney Princess Bundle – a tablet complete with “Disney” apps (price $130)
Product Overview • Learning games, apps, eBooks, videos, music, toys, and more • Currently sell 2 versions of LeapPads, 2 hand held computers (GS and the Explorer), 2 sets of eBooks (Tag and the Tag Junior), learning toys, and iPhone and iPad apps • LeapPads -- $120 • GS and Explorer -- $70 • eBooks -- $25 to $170 bundles • Toys -- $10 to $25 • Apps -- $0.99 www.LeapFrog.com
Recent News • Leapfrog has won over 80 awards from the Parent’s Choice Foundation • As of 2013 – The new management team has shifted their emphasis from toy development to educational entertainment • Leapfrog has sold more than 100 million books, over 100 million educational toys and over 55 million tablet and gaming platforms.
Transition Period Educational Entertainment Toy Development Transition by Management • Changes the target market from infant to grade-schooler • Addition rather then a substitute to current product line
2013 Outlook • New product launches include: • Learn-to-read system • iPhone and iPad apps • New version of LeapPad tablet • Global distribution networks • Including 4 interactive languages • Growth Strategy: long term investments in content, international expansion, online communities, systems, and new platforms
Accounting • Utilize FIFO inventory recognition • Emerville, California – Headquarters and Operations • Type of possession: Lease • Fontana, California – Distribution Center • Type of possession: Lease • Income tax benefits • 2012 – ($24,504,000) & 2011 – ($1,137,000) • Due to the recognition of previously unrecognized tax carryforwards
Manufacturing • Designed to maximize the use of outsourced services • With respect to physical production and distribution • Highly seasonal business • Manufacturers are located in Asia, primarily in China • Top three vendors supplied 73%, 65%, and 57% of LeapFrog’s products in 2012, 2011, and 2010 respectively • Largest manufacturers are: Wynnewood Corp. Ltd. & WKK Technology Limited • They are billed by manufacturers in US dollars
Operations • Develop products primarily in the United States • Marketing efforts are centered on North America • Lesser extent to Europe and the rest of the world • Foreign currency transactions are hedged through short term futures contracts
EBIT Breakdown by Region • However, his does not explain the entire picture
LeapFrog 2012 10k Report • EBIT in terms of United States has grown exponentially since 2010 • A similar expansion strategy into the foreign market place would lead to enormous economies of scale United States Foreign Figures are in thousands
Domestic Sales • The big three US retailers: Wal-Mart, Toys “R” Us, and Target have historically accounted for a substantial portion of gross sales
Equity Snapshot • Stock Price: $8.33 • Beta: 1.26 • TTM P/E: 6.72 • Forward P/E: 11.11 • PEG Ratio (5 year): 0.67 • Price/Book: 1.76 Source: www.finance.yahoo.com
Stock Performance Hasbro Inc. (HAS) Mattel Inc. (MAT) Source: www.finance.yahoo.com
Industry Overview Source www.finance.yahoo.com Hasbro Inc. Mattel Inc.
Porters 5 Force Analysis • Bargaining Power of Buyers: Moderate • Evidence: high profit margins exist • Niche market, little direct competiton • Bargaining Power of Suppliers: Moderate • Computer components and assembly have become commodities • Competitive advantage lies in the programming, not the physical interface • They have 3 main manufacturers • Threat of New Substitutes: High • Classic teaching methods still dominate the educational market • Apple and Samsung tablets can offer “learning” apps that mimic those offered by Leapfrog.
5 Force Analysis Continued • Competitive Rivalry within the Industry: Moderate • There is no definitive market dominance • Educational Technology for individual users is a relatively new industry (use of the “pad”) • Threat of New Entrants: High • App market is vast and easy to gain market presence • Brand loyalty has yet to be established – users “children” unable to recognize the difference between a Leapfrog product and an Apple Product.
Macroeconomic Condition • Consumer confidence has shown slow signs of improvement Source: www.dailycapitalist.com
SPDR – XLY Performance • Consumer Discretionary Select Sector • Consistent growth in discretionary spending over the 2y Source: www.finance.yahoo.com
2012 4th Quarter Highlights Highlights of full year 2012 results compared to full year 2011 results: • Consolidated net sales were up 28%. • U.S. segment net sales were up 24%, and international segment net sales were up 38%. • Income from operations was up 170%. • Income from operations as a percentage of net sales was 11.0%, more than double the prior year. • Net income was $86.5 million, up 334%. • Adjusted EBITDA was $93.1 million, up 89%. • Cash and cash equivalents were $120.0 million as of December 31, 2012, up 67% compared to the balance as of December 31, 2011.
WHAT is Bringing in the Money? • According to management (2012 Annual Report): • -”LeapPad” – one of the generally more expensive items. • -“App” sales for iPhone and iPad • In general, sales are increasing for the technology products, however the less technology intensive projects have greater margins.
Revenue/Cost Tradeoffs • Overall Retail Inventory Levels have increased since 2010 • Sales increased by 5% while Cost of Goods increased by 6% (as a reflection of the proportionally higher sales of higher cost platforms “pads”) • Decreased Marketing expenditures to offset increased COGS (of technology products) and Operating expenditures.
WHEN is the Money Coming in? According to 2012 Annual Report: Quarterly Cash Flow
Financial Analysis - Recent Growth • Consistent Expansion in Price and Volume Components • Suggests that LeapFrog is still in a growth stage 432,564 455,140 581,288 Net Sales (in thousands, USD)
Valuation • DCF Suggests 20% Upside
Valuation • Comparable Analysis • Trailing versus forward P/E
Decision Drivers • GICS Application • Clear Management Goals • Discounted Cash Flow • Comparable Analysis
Recommendation • Buy 2000 Shares at the Current Market Price • Current Stock Price of $8.20 • Order total: $16,400