LeapFrog Enterprises Inc. (LF)
Richie Hartz, Patrick O’Donnell, Matthew Rasinski
Tuesday, April 2nd 2013
S
Agenda
S Introduction
S Company Overview
S Industry Overview
S Stock Performance
S Financial Analysis
S Valuation
S Recommendation
Introduction
S LeapFrog trades on the NYSE with ticker symbol LF
S Company was founded in 1995 by Micheal Wood and
Robert Lally and headquartered in Emeryville, California
USA
S Focus: educational entertainment
S Concept was originally designed to educate Wood’s son
through toys
Company Overview
S
LeapFrog - designs, develops, and markets technology-based products for the
purpose of education
S
Demographics – infants through 9 years of age
S
Focus on math, reading, writing, science, social studies, creativity, life skills,
and foreign languages
S
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).
S
In 2013, the firms top product is the Disney Princess Bundle – a tablet
complete with “Disney” apps (price $130)
Product Overview
S Learning games, apps, eBooks, videos, music, toys, and more
S 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
S LeapPads -- $120
S GS and Explorer -- $70
S eBooks -- $25 to $170 bundles
S Toys -- $10 to $25
S Apps -- $0.99
www.LeapFrog.com
LeapFrog Products
Recent News
S
Leapfrog has won over 80 awards from the Parent’s Choice
Foundation
S
As of 2013 – The new management team has shifted their
emphasis from toy development to educational
entertainment
S
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
S New product launches include:
S Learn-to-read system
S iPhone and iPad apps
S New version of LeapPad tablet
S Global distribution networks
S Including 4 interactive languages
S Growth Strategy: long term investments in content, international
expansion, online communities, systems, and new platforms
Accounting
S Utilize FIFO inventory recognition
S Emerville, California – Headquarters and Operations
S Type of possession: Lease
S Fontana, California – Distribution Center
S Type of possession: Lease
S Income tax benefits
S 2012 – ($24,504,000) & 2011 – ($1,137,000)
S
Due to the recognition of previously unrecognized tax carryforwards
Manufacturing
S Designed to maximize the use of outsourced services
S With respect to physical production and distribution
S
Highly seasonal business
S Manufacturers are located in Asia, primarily in China
S Top three vendors supplied 73%, 65%, and 57% of LeapFrog’s
products in 2012, 2011, and 2010 respectively
S Largest manufacturers are: Wynnewood Corp. Ltd. & WKK
Technology Limited
S They are billed by manufacturers in US dollars
Operations
S Develop products primarily in the United States
S Marketing efforts are centered on North America
S Lesser extent to Europe and the rest of the world
S 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
United States
Foreign
Figures are in thousands
S EBIT in terms of United States has grown exponentially since
2010
S A similar expansion strategy into the foreign market place would
lead to enormous economies of scale
Domestic Sales
S The big three US retailers: Wal-Mart, Toys “R” Us, and Target
have historically accounted for a substantial portion of gross
sales
Equity Snapshot
S
Stock Price: $8.33
S
Beta: 1.26
S
TTM P/E: 6.72
S
Forward P/E: 11.11
S
PEG Ratio (5 year):
0.67
S
Price/Book: 1.76
Source: www.finance.yahoo.com
Stock Performance
Hasbro Inc. (HAS)
Mattel Inc. (MAT)
Source: www.finance.yahoo.com
Industry Overview
Hasbro Inc.
Mattel Inc.
Source www.finance.yahoo.com
Porters 5 Force Analysis
S
Bargaining Power of Buyers: Moderate
S
S
S
Bargaining Power of Suppliers: Moderate
S
S
S
S
Evidence: high profit margins exist
Niche market, little direct competiton
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
S
S
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
S Competitive Rivalry within the Industry: Moderate
S There is no definitive market dominance
S Educational Technology for individual users is a relatively new
industry (use of the “pad”)
S Threat of New Entrants: High
S App market is vast and easy to gain market presence
S 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
S Consumer Discretionary Select Sector
Source:
www.finance.yahoo.com
S Consistent growth in discretionary spending over the 2y
2012
th
4
Quarter Highlights
Highlights of full year 2012 results compared to full year 2011 results:
SConsolidated net sales were up 28%.
SU.S. segment net sales were up 24%, and international segment net sales were up 38%.
SIncome from operations was up 170%.
SIncome from operations as a percentage of net sales was 11.0%, more than double the prior year.
SNet income was $86.5 million, up 334%.
SAdjusted EBITDA was $93.1 million, up 89%.
SCash 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?
S According to management (2012 Annual Report):
S -”LeapPad” – one of the generally more expensive items.
S -“App” sales for iPhone and iPad
S In general, sales are increasing for the technology products,
however the less technology intensive projects have greater
margins.
Revenue/Cost Tradeoffs
S Overall Retail Inventory Levels have increased since 2010
S Sales increased by 5% while Cost of Goods increased by 6%
(as a reflection of the proportionally higher sales of higher
cost platforms “pads”)
S 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
Revenue Cost/Tradeoffs
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
S DCF Suggests 20% Upside
Valuation - Sensitivity
Sensitivity Analysis
Terminal
Growth
Rate
2.0%
2.5%
3.0%
3.5%
4.0%
12%
$13.41
$13.85
$14.34
$14.89
$15.51
14%
$11.22
$11.50
$11.80
$12.14
$12.50
Discount Rate
16%
$9.66
$9.85
$10.05
$10.27
$10.50
18%
$8.50
$8.63
$8.77
$8.92
$9.08
20%
$7.60
$7.69
$7.79
$7.90
$8.01
Valuation
S Comparable Analysis
Competitor
Hasbro Inc. (HAS)
Mattel, Inc. (MAT)
Enterprise Value/EBITDA
8.6
11.2
Price/Tangible Book Value
9.1
11.6
Trailing P/E
17.1
19.6
Forward P/E
13.9
14.2
Average Multiple
9.9
10.35
18.35
14.05
Implied Price
Weight
$5.90
30%
$7.03
30%
$22.75
10%
$18.45
30%
Weighted-Average Price
$11.69
- Trailing versus forward P/E
Decision Drivers
S GICS Application
S Clear Management Goals
S Discounted Cash Flow
S Comparable Analysis
Recommendation
S Buy 2000 Shares at the Current Market Price
S Current Stock Price of $8.20
S Order total: $16,400