LeapFrog: Leap on Board

04/02/2004 12:00 am EST

Focus:

Sherri Parker

Co-Editor, UnDiscovered Stocks

"When we were scouting for our featured stock this month, we were thrilled to come across a business that has made childhood education its priority," says Sherri Parker and Nancy Zambell, co-editors of UnDiscovered Stocks.  Here's their review of Leapfrog.

"LeapFrog Enterprises (LF NYSE) has taken the toy world by storm. From inception in 1995, LeapFrog is stealing market share from the big guys and has leapt over its competitors to grab third place in the industry, after Mattel and Hasbro. And it's laughing all the way to the bank. LeapFrog designs technology-based educational toys and related proprietary content targeted to children of all ages. Their products are so innovative and fun that they have practically sold themselves to consumers, creating a formidable brand name.

"One of the largest and fastest-growing segments of the US population is the infant/preschool crowd. LeapFrog already has 28% of this market cornered and owns a stunning 75% of the pre-school electronic learning aids segment. For fourth quarter 2003, the company was the #1-selling preschool toy manufacturer. Meanwhile, an expanding legion of educators, homeschoolers, and working parents have turned the video game trend to their advantage by promoting educational electronic games to supplement school-based learning. The strategy is so successful that a new term has been coined to describe it: Edutainment. And although competitors are trying to move in on its gargantuan lead in the marketplace, LeapFrog is in the catbird seat to garner the giant portion of future market growth.

"LeapFrog's products are designed to help children learn age- and skill-appropriate subject matter, including phonics, reading, math, spelling, science, vocabulary, social studies, geography, history, and music. The company even launched a bilingual education series. The company was also quick to jump on the No Child Left Behind bandwagon, with its LeapTrack assessment and instruction system. Just last month, LeapFrog was selected by the US Department of Education to participate in two studies evaluating the effectiveness of its products in achieving early literacy gains. Bottom line: The outlook for this sector tremendous, and LeapFrog has a strong foothold—essential as competition heats up.

"LeapFrog has been one of those momentum darling stocks, favored by just about every analyst on Wall Street. But in the last few months, its stock price has suffered due to a temporary softening in the toy industry, as well as a dose of too much growth too soon, which has caused the company to step back, take a look at its costs, and reconfigure its management team. As a result, the stock is ‘out-of-favor’. Wall Street's fickle analysts have scampered for the bushes, leaving the stock at an unbelievable discounted value—just right for ‘leaping’ onto its shares and creating the perfect opportunity for you. Right now, the stock is trading at a price-earnings ratio of just 16.1—36% lower than its peers. Yet, it's on top of its market, with fabulous growth potential. Don't let this opportunity pass you by—leap on board and enjoy the ride."

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