Leapfrog Enterprises
Inc.
November 14, 2013
Yi Liu, Ye Liang, Charalampos Ntantanis,
Caleb Pierson
Agenda
• Company Background
• Current Position
• Macroeconomic Outlook
• Industry Overview
• Financial Analysis
• Valuation
• Recommendation
Current Position
• RCMP recommended for purchase 2000
shares @ market (8.20) which resulted in
buying 2000 shares @ $8.19 on April 5, 2013
• Current Stock price is $8.13
• This is an unrealized loss of 0.73%
Macroeconomic
Outlook
• World (and U.S.) population is growing across
the toy consumer age range
• Dollars spent on toys increased 7.68% from
2007 to 2012
• Youth electronics decreased slightly from
2011 to 2012
• Nostalgic/Retro toys are making a big push
this year
• The Consumer Sentiment Index is at the
lowest point since 2011
Bloomberg News and Toy Industry Association Inc.
Industry Overview
• The U.S. Toy market was worth $22 billion in
2012
• Industry products include dolls/action figures,
models, construction kits, scooters, board
games, game consoles
• Small companies are able to compete
alongside larger businesses by focusing on
niche products and by reacting more quickly
to new trends
Source: Hoovers
5 Forces for Toys and
Games
Source:
Marketline
5 Forces Analysis
Buyer Power
Supplier
Power
Threat of
New Entrants
Threat of
Substitutes
Degree of
Rivalry
Moderate
Moderate
Moderate
High
High
Individuals
have
relatively
little impact
Few large
manufacture
s
Patents help
protect ideas
Knock off
goods
Many
companies
offer
products
Cost of
switching is
low
Suppliers are
unlikely to
forward
integrate
Easy to self
produce and
market
Cost of
switching is
low
Short lived
popularity
Source: Marketline
Company Overview
• Leapfrog trades on the NYSE
with ticker symbol LF
• Company was founded in 1995
by Michael Wood and Robert
Lally and headquartered in
Emeryville, California USA
• Focus: Educational
Entertainment for Children
• Employees: 552 people on a fulltime basis
Source: Company Website and 2012 10k
Business Segments
and Operations
• United States: 73%, 75%, 80% in 2012,
2011and 2010
• Three large retailers: Wal-Mart Stores, Inc.
Toys “R” Us, Inc. and Target Corporation
• International
• United Kingdom, France, Canada, Mexico,
Australia, South Africa and Spain.
Source: 2012 10k
Product Portfolio
Source: Company Website
Product Portfolio
• Currently sell 2 versions of LeapPad, 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
Source: Company Website
Risk Factors
• Highly seasonal – Approximately 75% of total
sales to retailers to occur during the third
and fourth quarters.
• Growing strategic focus on online products
and services – Depends on consumer
acceptance
• Rely on a limited number of manufactures
• Liquidity maybe insufficient to meet the
long-term or periodic needs
Seasonality
Source: 2012 10k
SWOT analysis
Strength
Weaknesses
Portfolio of patents
Highly dependent on few
manufacturers
Strong operating record
Pending litigation
Strong growth in LeapFrog school
house
Client concentration
Opportunities
Threats
Strong cash reserves facilitate new
product development
Competition
Seasonal fluctuations
Growing ESOL (English to Speakers
of Other Languages) population in
US
Leverage strategic relationships
Absence of long-term agreements
with retailers
Management Outlook
• A number of changes to executive
management team during 2012 and 2011
• Anticipate continued business growth at a
pace ahead of the market with net sales
expected to increase at high single –digit
percentage growth rate
• Plan to make long-term investments in
content, international expansion, online
communities, systems and new platforms
Major Shareholders
Top Institutional Investors (over 5%)
Wellington
Management
Company, LLP
6,363,081
9.86
62,612,717 Jun 30, 2013
Wells Fargo &
Company
4,539,515
7.03
44,668,827 Jun 30, 2013
Franklin
Resources, Inc
4,285,970
6.64
42,173,944 Jun 30, 2013
Vanguard
Group, Inc.
(The)
3,811,129
5.91
35,900,835 Sep 30, 2013
Source: Yahoo finance
Major Shareholders
Top Mutual Fund Holders
Franklin TempletonTempleton Global
Smaller Companies
Fund
Templeton Global
Smaller Companies
Fund, Inc. (USA)
Oppenheimer Global
Opportunities Fund
Wells Fargo Advantage
Discovery Fd
2,663,3
80
4.13
25,089,039 Sep 30, 2013
2,663,3
80
4.13
25,621,715 Aug 31, 2013
3.87
24,600,000 Jun 30, 2013
3.49
21,691,176 Aug 31, 20
2,500,0
00
2,254,8
00
• Well known financial institutions
Source: Yahoo finance
Key People
• Mr. John Barbour, Chief Executive Officer,
Director and Member of Non-executive Officer
Stock Award Committee
• Raymond L. Arthur, Chief Financial Officer
• Gregory B. Ahearn, Chief Marketing Officer
and Executive Vice President
Source: Businessweek
Recent Financial
Information
Source: Capital IQ
Recent Financial
Information
Source: Capital IQ
Financial Analysis
Liquidity Ratios
2008
Current Ratio
Quick Ratio
Cash Ratio
Inventory Turnover Ratio
Days Supply of Inventory
A/R Turnover
Days Sales Outstanding
240.2%
183.2%
79.2%
483.7%
75.47
510.5%
71.49
2009
250.8%
222.2%
62.7%
786.2%
46.43
257.7%
141.62
2010
321.4%
256.4%
26.7%
532.9%
68.50
274.4%
133.02
2011
319.3%
279.1%
84.2%
783.5%
46.59
289.1%
126.24
2012
389.2%
345.4%
130.5%
834.0%
43.77
322.9%
113.05
Financial Analysis
Asset Management Efficiency Ratios
Total Asset Turnover
Fixed Asset Turnover
2008
2009
2010
2011
2012
150.0%
2340.8%
124.1%
2662.1%
147.4%
2872.5%
137.5%
2545.4%
135.5%
2450.3%
Financial Analysis
DuPont Analysis (ROE)
Tax Burden
Interest Burden
Operating Profit Margin
Asset Turnover
Leverage
ROE
2008
102.8%
114.6%
-12.64%
150.0%
170.1%
-38.0%
2009
27.2%
121.4%
-2.14%
124.1%
158.8%
-1.4%
2010
82.8%
70.1%
1.97%
147.4%
142.8%
2.4%
2011
106.1%
78.0%
5.28%
137.5%
142.2%
8.6%
2012
139.6%
96.5%
11.05%
135.5%
130.0%
26.2%
Recent Stock
Performance
Source: Capital IQ, Yahoo Finance
Metric
Value
Current Price
$8.13
Trailing P/E
7.03
Forward P/E
20.64
Market Cap ($mil)
$560.32
Valuation — WACC
Source: Yahoo Finance, Bloomberg
Valuation — DCF
Valuation — Comps.
Source: Capital IQ
Comps. Stock Chart
Source: Yahoo Finance
Decision Drivers
• Strengths
• Climbing Revenues
• Strong Cash Position
• Highly specialized
• DCF ($8.57)
• Concerns
• Raising competition from big players
• Seasonal fluctuations
Recommendation
Hold
Questions?