Sunday, May 21, 2006

No Toyin' Around: S+P Cuts Leapfrog

Standard & Poors cut shares of Leapfrog (LF) to a hold recently after the CA-based maker of educational toys spit out some shoddy 1Q numbers. Shares of Leapfrog are down 2% since we told investors to approach Leapfrog with caution in our Capitalize on Those Cry Babies report. First S+P, then us:

Standard and Poors "First quarter loss of 38 cents vs. 32 cents loss is wider than our 26 cents loss forecast. Sales fell 7%, as sharp declines in the International and Education & Training segments more than offset a 6% rise in U.S. Consumer. While we think LeapFrog Enterprises has initiatives in place to restore growth and profitability over long term, we do not see a near-term catalyst. Plus, we are concerned about lack of visibility in Education & Training and sales weakness in International, both higher-margin segments. We are lowering our target price to $12 from $15, a price to sales ratio of 1.1 times, as we no longer think premium is warranted." published May 6

Catablast! Media Group "Leapfrog makes toys for children in the 6 month to preteen segment. Toys are an unattractive industry if you’re looking for a steady stream of earnings: what could be more volatile than that hottest gizmo your kid is pining day and night for? One day it’s Pokemon, the next day it’s Teletubbies. Leapfrog had a terrific 3 year run (sales mushroomed fivefold from 2000 to 2003, thanks to the Leappad), but since then, it’s been struggling to regain customer attention by aggressively marketing its core educational product niche. It’s latest gadget is the FLY pentop computer, which most analysts predicted would stumble. They were right — the pentop has yet to grab critical mass, so it look’s like Leapfrog’s time is running out. Since over 60% of Leapfrog’s sales come from the Walmart/Target channel, a sudden dearth of product innovation could spell lower shelf space, which would in turn spell disaster. Although LF has a clean balance sheet and $95M in cash to deploy on new projects, overall you have an unpredictable company operating in a fragmented industry — approach this one with caution." published April 24

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