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Home | Getting Started | Personal Finance | Q & A | Sample Portfolio | Glossary | About Us |
| Date: Friday 05th 2008f September 2008 05:46:47 PM |
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Leaping into a Hole -12/28/04 |
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| By: Hari Wibowo | ||||||||||||||||||||
| Business Background | ||||||||||||||||||||
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LeapFrog Enterprises (LF) is
a designer, developer
and marketer of technology-based educational products. It targets primarily
toodler and infant by helping them learn age and skill appropriate subject
matter such as reading, writing and spellings.
Why LeapFrog, you said? Well, investment opportunities generally appears when a company encounter a short term problem. LeapFrog has plunged into a small little mud based on the announcement here, but I for one, think that the company will be able to leap itself out of the hole. |
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| Quarterly Current ratio that is greater than one and is stable or rising. | ||||||||||||||||||||
Quarterly current ratio is fluctuating widely over the last four quarters. This is understandable as the company's business is highly seasonal. Looking at yearly trend, we have a much clearer picture on Leap Frog's current ratio. The company has been steadily strengthening its current ratio over the last three fiscal years. Current ratio of Leap Frog is excellent. Not every companies possess a current ratio like this. I believe that the risk of Leap Frog going bankrupt over the next year is almost none. The company have ample liquidity for at least three years and their balance sheet is excellent. As of Sep 04, LF had a $120 M of cash balance with no long term debt. As I said earlier, the company's balance sheet is excellent and the risk of bankruptcy is almost none.
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| Fair value of the stock is 2% above current free risk interest rate (10 yr bond) | ||||||||||||||||||||
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As of 12/03 2004, 10 yr bond yields 4.24%. I assume interest rate to rise slightly to 5% within a year. The stock needs to yield 7% to give it a fair value. P/E value for LF is therefore14.3. EPS for LF for fiscal year '05 is predicted to be $1.19. For more details about EPS calculation, please go here. I believe that LF can grow revenue 5-10% for the next 5 years. This warrants a higher P/E for the stock. A reasonable guess is for LF stock to be yielding between 5-6%. This translates into a P/E of 16.6 - 20. I will use a P/E of 18 as the fair value for Leap Frog. With a fair P/E value of 18, the real price for LF is therefore $ 21.42/share. Meanwhile, Cash per share for LF is $1.97/share and Long Term Debt per share = $0. Real price = stock price - (cash+ short-term investment) + long-term debt. Stock price = $21.42 + $1.97 - $0.0 = $23.4/share. |
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| 50% potential stock price appreciation within a year. | ||||||||||||||||||||
| Current price for LF is $13/share. With a fair value of $23.4/share, LF can therefore be bought with 80% potential price appreciation. | ||||||||||||||||||||
| Conclusion | ||||||||||||||||||||
| I believe LF represents a good value for investment with 80% potential price appreciation. I will make the purchase in the amount of $2,000 on Thursday December 30th 2004 for our sample portfolio. | ||||||||||||||||||||
| Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding LeapFrog Enterprises (LF) or other securities. | ||||||||||||||||||||
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