Novice Investing - Kissing A Frog

Date: Thursday 07th 2008f August 2008 01:40:34 PM

Kissing A Frog - 02/16/2006

By: Hari Wibowo

After reporting a stellar earning back in November, Leapfrog Enterprises Inc.(LF) beat earning expectation for the fourth quarter of 2005. Revenue was slightly down to $ 248.8 Million while profit for the quarter is 23 cents per share. Earning expectation for the quarter is 21 cents per share. So, this is good news, right? I don't think so. Revenue was $ 40 M lighter than analysts' expectation. That is a lot of lost revenue. It is certainly lower than our predicted revenue of $ 347.9 Million back in November 2005.

Apparently, the much trumpeted pentop does not go as well. Otherwise, why would sales fell 3% year over year? Last year, Leapfrog had no pentop to boost its top line. While gross margin rose and expense fell for the quarter, the lack of revenue is a concern. What other new products are needed to drive revenue? It is a disappointment but still, management trumpeted the fact that Fly Pentop has been picked as "Toy of the year" by American International Toy Fair.

With the fourth quarter earning release, we can calculate the total net income for Leapfrog for all of 2005. It comes in at 28 cents per share, way way below our expectation of $ 0.93 per share. So, what should we do to our stock portfolio pick this time? Analysts 'merely' expect a $ 0.41 per share profit for 2006 while revenue stays stagnant. In our calculation last year, we expect revenue to be up 5-10% yearly and profit to stay near $ 1.00 per share. It CAN be achievable if Leapfrog's other division stays stagnant while fly pentop give additional gain in revenue. The problem is it doesn't turn out that way, at least for the fourth quarter of 2005.

With earning estimate of $ 0.41 per share, Leapfrog is estimated to have a fair value of (18 x $ 0.41) + $ 1.97 = $ 9.35 per share. This assumes a 0% growth in profit. This is a difficult decision. While we should've sold Leapfrog based on this information, the stock price is already low. Can the stock price go lower? Perhaps. But, if Leapfrog shows another year of improvement, Leapfrog can rise 50% from the current price of $ 12.60. Yes, it is painful to wait another year. But, it does not make sense to sell a stock that trade near its low, has a solid balance sheet and most importantly, profitable. Gross margin and operating expense has shown some improvements last quarter. Profit will hopefully come along. So for now, we will continue holding Leapfrog giving it a chance to improve for one more year.

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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