LeapFrog Enterprises, Inc. (L): Should You Leap at This Opportunity?

Of particular interest to investors is the growth and earnings potential of the company. The company’s revenue grew by 28% in 2012 while net income tripled over the course of the year. This is due in large part to LeapFrog Enterprises, Inc. (NYSE:L) recognizing the trend toward digital toys and tablets and establishing an early foothold in the market for children’s tablets, as well as an expansion of its animated educational videos starring popular LeapFrog characters. Sporting a low price-to-earnings ratio, impressive cash generation, a recent history of producing toys that sell well during the holiday season and plans to expand into international markets, the likelihood that LeapFrog will turn a profit for its investors is high.

An acquisition target?

There has been some speculation that either Mattel or Hasbro could start looking at LeapFrog as a potential target for acquisition. While it would be a smart move for either company as it would net the buyer a proven toy range and a trusted brand name, I can’t help but hope that the larger players leave this little tadpole alone. Though if one of the larger companies does decide to purchase LeapFrog then there would be little that could be done to stop it; both companies have more than enough cash on hand to complete the purchase, with operating cash that exceeds LeapFrog’s entire market cap of $580 million.

Making the leap

Investing in a toy company can be a bit anxiety-inducing since the companies tend to suffer from cycles in consumer interest throughout the year. Further, the recent recession has proven that companies like LeapFrog Enterprises, Inc. (NYSE:L) aren’t immune from economic downturns. As I’ve said before, however, if you’re going to invest in a toy company then LeapFrog is one of your best bets. It’s a smart company making smart toys, and if it eventually gets bought out then whichever of the big boys buys it will likely pay a premium for it. Toys can be risky business, but this is the company that you want in your portfolio.

The article Should You Leap at This Opportunity? originally appeared on Fool.com and is written by John Casteele.

John Casteele has no position in any stocks mentioned. The Motley Fool recommends Hasbro, LeapFrog Enterprises (NYSE:LF), and Mattel. The Motley Fool owns shares of Hasbro and LeapFrog Enterprises. John is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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