LeapFrog Enterprises (NYSE:LF) offers an alternative to the traditional after-school tutoring and summer school options—learning toys.
And, judging from this morning stunning earnings announcement, LeapFrog’s products are in hot demand.
Let’s take a closer look at this stock and see whether LF is a smart play.
Founded in 1995, LeapFrog helped pioneer and popularize technology-based learning toys for children. The company has rolled out a number of products, including the LeapPad interactive book, the Leapster handheld gaming console, and the LeapFrog Tag electronic handheld stylus.
All of these products are designed to teach children everything from reading to mathematics to English as a second language. With less than 500 employees, LeapFrog Enterprises is a relatively small yet agile toymaker.
There are six key players in the Toys and Games industry. Of those, LeapFrog Enterprises Inc. ranks fourth in terms of market cap. The company stands out because it has the highest earnings growth in the industry, as well as the second highest sales growth and Price/Earnings to Growth ratio.
Now, the company could stand to improve its long-term growth rate, which ranks at fourth, and its return on equity, which is dead last. LeapFrog Enterprises’ primary competitors are Hasbro (NASDAQ:HAS) and Mattel (NASDAQ:MAT).
While LeapFrog is dwarfed by these two companies in terms of market cap, this company comes out on top in terms of sales growth. It falls behind in terms of gross margin and operating margin.
Shares of LF surged almost 20% at today’s open after the company announced stunning operating results for the first quarter. Compared with the same quarter last year, net sales soared 81% to $72 million. This trumped the $51 million consensus sales estimate by a whopping 41%.
In Q1 2011, the company posted a $22 million loss from operations; last quarter the company narrowed this loss to $9 million, or 14 cents per share. This came in far above the consensus estimate, which called for a net loss of 26 cents per share.
Management is optimistic about the company’s ability to continue delivering earnings growth thanks to its leading position in the educational entertainment industry. The company now expects 2012 net sales to increase 10% to 13% compared with last year and net income to nearly double to 57 cents per share.
Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. This stock has made a complete 180º reversal in the past 12 months. A year ago, LF was an F-rated stock, but has since improved to an A rating. That’s mostly thanks to a surge in buying pressure for this stock, but the company has also firmed up in terms of fundamentals.
Currently, Leap Frog boasts great operating margin growth as well as earnings momentum. The company is also strong in terms of earnings growth and history of beating earnings surprises.
Even so, Leap Frog Enterprises could stand to improve its sales growth, cash flow and return on equity. This stock receives a B for fundamentals and an A for buying pressure.
Bottom Line: Due to this stock’s strong earnings report and high level of buying pressure, I consider LF an A-rated buy.
Recommendation: A-Rated Buy
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