The editorial team at Time to Play, a website dedicated to providing information about products and services for children, recently announced that the winner of its third annual "Ultimate Wish" award was LeapFrog Enterprises (NYSE:LF) and its hugely popular LeapPad Explorer tablet for kids four- to eight-years old. Consumers nationwide voted for the toy at the top of their wish list and this year Leapfrog is the winner. This Christmas, investors are witnessing the continuing revival of this longtime producer of educational toys. Although its stock is up more than 80% since the introduction of its kids tablet in August, this is only the beginning. (For related reading, see 5 Most Profitable Toys Of Past Christmases.)

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.


I'll start my argument for buying LeapFrog's stock with the topic of the day. LeapPad isn't just popular, it's a must-have this Christmas. In a press release from December 9, Toys "R" Us announced it would have 30,000 LeapPad's available in its stores the next morning when it opened at 6am. Available on a first-come first-served basis, I'm sure most LeapPads were sold within the hour. Despite this frenzy, industry experts suggest this holiday season won't be a barn burner when it comes to toy sales. A recent survey conducted by UBS and America's Research Group suggests parents believe there is no must-have toy this year. Stephanie Lucy, vice president for toys at Target (NYSE:TGT) confirms this notion suggesting she isn't seeing people clamoring for any one product. While the LeapPad might not be a home run, it's a solid double and the proof lies in LeapFrog's third quarter report. Revenues increased 5% in its U.S. segment and 28% internationally. Most of those revenue increases are attributed to the "strong launch" of the LeapPad Explorer. In just 45 days, the LeapPad made that kind of difference. Imagine what it will do in a full 90-day quarter at its busiest time of the year.

Operating Cash flow

The first nine months of 2011 are a complete turnaround from last year. Its operating cash flow in the first three quarters was $20.6 million, $43.6 million higher year-over-year. The trailing 12-month operating cash flow is $21 million, which is higher than its net income of $17 million. This is important when you compare its current situation to 2003, its best year in the past decade, when it generated $680 million in revenue and net income of $73 million. Its operating cash flow in 2003 was $27 million, just 37% of net income, compared to 124% in the trailing 12 months. Furthermore, LeapFrog's operating cash flow in 2003 included a $39 million tax benefit. Without it, there would have been negative free cash flow that year instead of $11 million, the exact same amount as today on 56% higher revenues. Leapfrog is far more efficient these days and this reality will be reflected in a higher stock price soon enough. (To learn more, read 12 Things You Need To Know About Financial Statements.)

LeapFrog Enterprises and Peers




LeapFrog Enterprises (NYSE:LF)



Mattel (Nasdaq:MAT)



Hasbro (Nasdaq:HAS)



VTech Holdings (OTCBB:VTKLY)



Share Price

Now that I've established that LeapFrog is getting its act together, it's time we look at its share price both then and now. Its stock hit an all-time high of $47.30 in October 2003. At the time, it was trading at 60 times cash flow and 2.4 times sales. That was much higher than the multiples for the S&P 500 at the time. Today, LeapFrog trades at around 18 times cash flow and 0.8 times sales, very much in line with the index. The dissenting argument to this illustration is that its revenues and net profits back in 2003 were much greater and therefore more deserving of a higher multiple. That's true to an extent. However, if we are also considering the way a company allocates capital, the modern-day version is a superior beast deserving of higher multiples. (For related reading, see How To Choose The Best Stock Valuation Method.)

The Bottom Line

LeapFrog is more than the LeapPad. Its TAG interactive reading system won the educational toy of the year award this past February. What they do beyond the LeapPad is critical to its future success. Something tells me they'll be just fine coming up with new ideas to stimulate the minds of kids and that's a great thing to invest in.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.
Related Articles
  1. Stock Analysis

    3 Resilient Oil Stocks for a Down Market

    Stuck on oil? Take a look at these six stocks—three that present risk vs. three that offer some resiliency.
  2. Economics

    Keep an Eye on These Emerging Economies

    Emerging markets have been hammered lately, but these three countries (and their large and young populations) are worth monitoring.
  3. Stock Analysis

    Is Pepsi (PEP) Still a Safe Bet?

    PepsiCo has long been known as one of the most resilient stocks throughout the broader market. Is this still the case today?
  4. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  5. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  6. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  7. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  8. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  9. Stock Analysis

    An Auto Stock Alternative to Ford and GM

    If you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
  10. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!