Novice Investing - LeapFrog Jumping Ahead ?

Date: Sunday 20th 2008f July 2008 12:34:38 PM

LeapFrog Jumping Ahead ? - 11/02/2005

By: Novice Investing Staff

Leapfrog Enterprises Inc.(LF) reported stellar earnings for the third quarter of 2005. Revenue was up nicely to $ 242.8 Million. EPS came in at $ 32.8 Million or $ 0.52 per share. A year ago, we predicted earning per share of $ 1.19 for fiscal year 2005. Is it still doable? We shall see.

4th quarter is generally the strongest quarter for Leapfrog. On our prediction, we estimated 4th quarter sales of $ 347.9 M, which shows 35% growth year over year. We believe that this might be doable. For 2004, the 4th quarter produces revenue of $ 256.7 M. Assuming a 10% growth, revenue for 2005 will be $ 282.3 M. Assuming a $ 50 M additional revenue from the new pen fly, we predict total revenue now to be $ 332 M for the 4th quarter. This might be ambitious but we are pretty positive about the Pen Fly introduced just this past October.

We will use 50% gross profit margin and $ 74.5 M operating cost (which is 20% higher than the third quarter). 50% gross profit is a 6 % increase gross profit margin over the third quarter of 2005. We believe this is doable due to the introduction of new pen fly. This gives $ 91.5 M in operating profit. Furthermore, Leapfrog has ample cash with no debt. We peg interest expense to be $ 0 and income tax to be 37%.

With that in mind, net income comes in at $ 57.6 M or $ 0.93 per share. With net loss of $ 9.8 M and $ 19.8 M for the first quarter and the second quarter respectively, Leapfrog is expected to post a profit of $ 60.8 M for the year or $ 0.98 per share.

Since we believe that Leapfrog can grow revenue by 5-10% for the next 5 years, the fair value for Leapfrog is with a yield of 5-6%. Using the midpoint, the fair P/E value for Leapfrog is 18.

Leapfrog has a net cash of $ 1.97 per share and its real price is 18 x $ 0.98 = $ 17.64

Real price = stock price - (cash+ short-term investment) + long-term debt.

Stock price = $ 17.64 + $1.97 - $0.0 = $19.61/share.

Leapfrog still represents 50% potential appreciation from our purchase of $ 13. All we can do right now is to wait and see for the 4th quarter's result.

END

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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 Inc..(LF) or other securities.

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