leapfrog enterprises inc. (lf) richie hartz, patrick o’donnell, matthew rasinski tuesday, april 2...
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LeapFrog Enterprises Inc. (LF)
Richie Hartz, Patrick O’Donnell, Matthew Rasinski
Tuesday, April 2nd 2013
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Agenda
Introduction
Company Overview
Industry Overview
Stock Performance
Financial Analysis
Valuation
Recommendation
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Introduction
LeapFrog trades on the NYSE with ticker symbol LF
Company was founded in 1995 by Micheal Wood and Robert Lally and headquartered in Emeryville, California USA
Focus: educational entertainment
Concept was originally designed to educate Wood’s son through toys
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Company Overview
LeapFrog - designs, develops, and markets technology-based products for the purpose of education
Demographics – infants through 9 years of age
Focus on math, reading, writing, science, social studies, creativity, life skills, and foreign languages
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).
In 2013, the firms top product is the Disney Princess Bundle – a tablet complete with “Disney” apps (price $130)
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Product Overview
Learning games, apps, eBooks, videos, music, toys, and more
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 LeapPads -- $120 GS and Explorer -- $70 eBooks -- $25 to $170 bundles Toys -- $10 to $25 Apps -- $0.99
www.LeapFrog.com
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LeapFrog Products
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Recent News
Leapfrog has won over 80 awards from the Parent’s Choice Foundation
As of 2013 – The new management team has shifted their emphasis from toy development to educational entertainment
Leapfrog has sold more than 100 million books, over 100 million educational toys and over 55 million tablet and gaming platforms.
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Transition Period
Toy Development
Educational Entertainment
Transition by Management• Changes the target
market from infant to grade-schooler
• Addition rather then a substitute to current product line
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2013 Outlook
New product launches include: Learn-to-read system iPhone and iPad apps New version of LeapPad tablet
Global distribution networks Including 4 interactive languages
Growth Strategy: long term investments in content, international expansion, online communities, systems, and new platforms
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Utilize FIFO inventory recognition
Emerville, California – Headquarters and Operations Type of possession: Lease
Fontana, California – Distribution Center Type of possession: Lease
Income tax benefits 2012 – ($24,504,000) & 2011 – ($1,137,000)
Due to the recognition of previously unrecognized tax carryforwards
Accounting
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Manufacturing
Designed to maximize the use of outsourced services With respect to physical production and distribution
Highly seasonal business
Manufacturers are located in Asia, primarily in China Top three vendors supplied 73%, 65%, and 57% of
LeapFrog’s products in 2012, 2011, and 2010 respectively Largest manufacturers are: Wynnewood Corp. Ltd. & WKK
Technology Limited
They are billed by manufacturers in US dollars
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Operations
Develop products primarily in the United States
Marketing efforts are centered on North America Lesser extent to Europe and the rest of the world
Foreign currency transactions are hedged through short term futures contracts
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EBIT Breakdown by Region
• However, his does not explain the entire picture
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LeapFrog 2012 10k Report
EBIT in terms of United States has grown exponentially since 2010
A similar expansion strategy into the foreign market place would lead to enormous economies of scale
United StatesForeign
Figures are in thousands
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Domestic Sales
The big three US retailers: Wal-Mart, Toys “R” Us, and Target have historically accounted for a substantial portion of gross sales
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Equity Snapshot
Stock Price: $8.33
Beta: 1.26
TTM P/E: 6.72
Forward P/E: 11.11
PEG Ratio (5 year): 0.67
Price/Book: 1.76
Source: www.finance.yahoo.com
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Stock Performance
Source: www.finance.yahoo.comHasbro Inc. (HAS)Mattel Inc. (MAT)
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Industry Overview
Hasbro Inc.Mattel Inc.
Source www.finance.yahoo.com
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Porters 5 Force Analysis
Bargaining Power of Buyers: Moderate Evidence: high profit margins exist Niche market, little direct competiton
Bargaining Power of Suppliers: Moderate 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 Classic teaching methods still dominate the educational market Apple and Samsung tablets can offer “learning” apps that mimic those
offered by Leapfrog.
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5 Force Analysis Continued
Competitive Rivalry within the Industry: Moderate There is no definitive market dominance Educational Technology for individual users is a
relatively new industry (use of the “pad”)
Threat of New Entrants: High App market is vast and easy to gain market presence Brand loyalty has yet to be established – users
“children” unable to recognize the difference between a Leapfrog product and an Apple Product.
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Macroeconomic Condition
• Consumer confidence has shown slow signs of improvement
Source: www.dailycapitalist.com
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SPDR – XLY Performance
Consumer Discretionary Select Sector Consistent growth in discretionary spending
over the 2y
Source: www.finance.yahoo.com
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2012 4th Quarter Highlights
Highlights of full year 2012 results compared to full year 2011 results:
Consolidated net sales were up 28%.
U.S. segment net sales were up 24%, and international segment net sales were up 38%.
Income from operations was up 170%.
Income from operations as a percentage of net sales was 11.0%, more than double the prior year.
Net income was $86.5 million, up 334%.
Adjusted EBITDA was $93.1 million, up 89%.
Cash and cash equivalents were $120.0 million as of December 31, 2012, up 67% compared to the balance as of December 31, 2011.
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WHAT is Bringing in the Money?
According to management (2012 Annual Report): -”LeapPad” – one of the generally more expensive
items. -“App” sales for iPhone and iPad
In general, sales are increasing for the technology products, however the less technology intensive projects have greater margins.
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Revenue/Cost Tradeoffs
Overall Retail Inventory Levels have increased since 2010
Sales increased by 5% while Cost of Goods increased by 6% (as a reflection of the proportionally higher sales of higher cost platforms “pads”)
Decreased Marketing expenditures to offset increased COGS (of technology products) and Operating expenditures.
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WHEN is the Money Coming in?
According to 2012 Annual Report: Quarterly Cash Flow
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Revenue Cost/Tradeoffs
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Financial Analysis - Recent Growth
• Consistent Expansion in Price and Volume Components
432,564 455,140 581,288
• Suggests that LeapFrog is still in a growth stage
Net Sales (in thousands, USD)
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Valuation
DCF Suggests 20% Upside
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Valuation - Sensitivity
12% 14% 16% 18% 20%2.0% $13.41 $11.22 $9.66 $8.50 $7.602.5% $13.85 $11.50 $9.85 $8.63 $7.693.0% $14.34 $11.80 $10.05 $8.77 $7.793.5% $14.89 $12.14 $10.27 $8.92 $7.904.0% $15.51 $12.50 $10.50 $9.08 $8.01
Discount Rate
Terminal Growth
Rate
Sensitivity Analysis
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Valuation
Comparable AnalysisCompetitor Enterprise Value/EBITDA Price/Tangible Book Value Trailing P/E Forward P/EHasbro Inc. (HAS) 8.6 9.1 17.1 13.9Mattel, Inc. (MAT) 11.2 11.6 19.6 14.2
Average Multiple 9.9 10.35 18.35 14.05
Implied Price $5.90 $7.03 $22.75 $18.45Weight 30% 30% 10% 30%
Weighted-Average Price $11.69
- Trailing versus forward P/E
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Decision Drivers
GICS Application
Clear Management Goals
Discounted Cash Flow
Comparable Analysis
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Recommendation
Buy 2000 Shares at the Current Market Price Current Stock Price of $8.20 Order total: $16,400