Make Your Portfolio LeapFrog Enterprises, Inc. (LF)

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It is not often that the market provides a chance to buy a fast growing company at bargain prices, but LeapFrog Enterprises, Inc. (NYSE:LF) is just such an opportunity.  Robert Lally and Michael Wood founded Leapfrog in 1995 in order to fill a personal need not met in the marketplace-a tool to help Mr. Wood’s son learn to read.  LeapFrog went public in 2002, and is now a leading designer and developer of technology products with engaging content to create effective learning experiences for children.

While the company went through a period of growth stagnation, under the current CEO, John Barbour, who joined the company in 2011, along with the leadership team he put together, the company has exceled with a culture built around entrepreneurship and innovation.  They have revived the product line-up, especially with the advent of the Leap Pad, and created a stable of best-in-class content, making LeapFrog a leader in children’s multimedia production and distribution.  Moreover, they have created a combination of award winning easy to use hardware, combined with unique software content made up of engaging games, videos, books, e-books, apps and music to create effective learning solutions for children.

LeapFrog Enterprises, Inc. (NYSE:LF)Content is King

A linchpin of Leapfrog’s creative team is a core group of child development and educational experts, setting LeapFrog’s content apart from competitors, and creating a brand that parents can rely upon.  The proof is in the sales; in 2012 multimedia sales grew 60%, and net sales of downloaded content from LeapFrog’s 475 titles (including proprietary titles and content from their 30 media partners), increased 400%.  LeapFrog’s award-winning line of Leap Pad cartridge content was the number one selling toy in the U.S. and a top ten selling toy in the UK.  According to NPD Group, LeapFrog had 3 out of the top 4, and 4 out of 10 of top selling toys in the U.S., and 2 out of the top 10 selling toys in the UK.  LeapFrog is continually expanding their market presence internationally, recently introducing the LeapPad to France and French Speaking Canada, with all products selling out.

Larger toy companies like Hasbro, Inc. (NASDAQ:HAS) and Mattel, Inc. (NASDAQ:MAT), which by most considerations are competitors, are also content partners.  While Mattel experienced modest sales growth in 2012, Hasbro’s sales dropped YOY, as overall conventional toy sales were lackluster.  Hasbro specifically saw a 5% drop in their preschool catergory and European sales, two areas that are a strength for LeapFrog. Neither company has a toehold in tablets, which should make them both nervous, as NPD Group reports growth in tablet use by children 4-14 years of age leapt from 3% in 2011 to 12% in 2012. According to Neilsen, 70% of children under 12 who live in households with tablet computers use those devices (57% use them for educational purposes). LeapFrog’s niche educational entertainment content and hardware has created an ecosystem that serves both children and parents’ needs, which has equated to outsized growth.  2012 revenue consisted of strong content sales, in tandem with strong hardware sales of LeapPads, and the Leapster GS system. The strength of sales of LeapPads was offset by slower growth in some toys, and platforms that are nearing the end of their product cycles.  U.S sales were up 24%, and international sales were up by 38%, for a combined increase of 28% year over year.

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