Hi, glad to see some more interest on the LF board. I will do my part and contribute to your fine post. I am LF investor since buying after the "crash" from 47 to 33 (after 3rd quarter miss), with an average cost basis now of about $28. I've averaged down quite a bit. I have a 3 yr old and we are avid fans of the company as well. Normally I am a value investor, but I switched to growth for this stock!a. Leap Frog is a relatively new company which IPOed in 2002.Their products are primarily educationaltoys and games targeted at toddlers to eighth grade kids. They are most successful from kindergardento toddlers. Case in point, today, 1st March 2004, they are in 5 out of the top 25 toys & games fromToyrus top seller list (http://www.amazon.com/exec/obidos/tg/new-for-you/top-sellers/-/toys/all/102-6670103-3007330 ). Moreinterestingly, they dominate 9 out of 25 from the same list under the Activities & Learning category.Yes, during xmas LeapFrog commonly had 13 of 25 of the top 25, and 40 of the top 100 at Amazon as well. www.amazon.co.uk has the top sellers for the U.K. and if you'll look you'll see that is REALLY dominated by LeapFrog. For many weeks during xmas season and afterwards up to 23 of the top 25 toys were LeapFrog products. I suspect the reason is that the LeapPad was recently introduced to the U.K. and is a very hot product there.b. LF's general competitors include Mattel, Hasbro and Jakks. In my view, there is a real bruisingfight brewing between Toy Biz(Marvel) series of toys (Spiderman, Fantastic 4 , Hulk etc) and Jakks's Anime series (Dragonball, Yu Yu Hakusho) and Hasbro's (Beyblade, Starwars, etc). LF is in a goodposition because of its focus on educational toys, FIsher Price is the closest competitor. Fisher-Price is the closest competitor, yep. FP's strength is more in the pre-school category, whereas LF has even less competition for the older age groups. Pixter (Mattel) and Video Now (Hasbro) are two products that compete with the Leapster somewhat. Don't forget about V-Tech who LF has all but forced out of the market. There are also a number of small toy companies that sell learning products, like Neurosmith for example. This past year everyone has started copying the LeapPad. Scholastic has a "book reader" which is like a poor quality leap pad, Fisher Price has their "Power Touch" which works using your finger and not a pen. Power Touch took some sales from LeapPad but I don't think Power Touch will win out in the end. The books for the LeapPad are more well done, and LeapFrog just has a better reputation in education. Not to mention currently there are around 100 LeapPad books and only 10-12 Power Touch books? LF launched the "Little Touch" (baby leap pad) and LeapPad Plus Writing (leap pad with a pencil for writing) to compete more effectively. Honestly I think LeapPad outsold Power Touch by a huge margin. Still PT is competition nonetheless.c. As a growing company, I suspect LF is also learning along the way, challenges like Scalability and managing inventories and cash flows are real issues. For example, they had issues with meeting demands for Leapster. They recently elevated the CEO & Founder Mike Wood to Chief Vision Officer. The then-chairman Kalinske resumes his role as CEO. And they brought in a Fisher-Price Brand & Mkt EVP Jerry Perez to lead as President. In my opinion, this is a good sign that the executive team recognizes the need for better brand marketing expertise, especially if it's from its closest competitor. Yes I agree. They've got problems with supply chain management, inventory, etc.. Part of the problem is there products nearly ALWAYS sell better than they expect. So there problem is their own product's popularity. I view this as a temporary problem however, and think that is why you can get LF for cheap right now.d. Downside & Risks* Shareholder dilution ( have not done enough reading, can someone comment ? )* Lawsuits. Since it's IPO, LF has been embroiled in lawsuits ranging from patent infringements (http://news.bbc.co.uk/2/hi/business/2154712.stm) to alleged financial misrepresentation (http://www.milberg.com/mil-cgi-bin/mil?case=leapfrog , http://biz.yahoo.com/iw/031209/060888.html , http://biz.yahoo.com/prnews/031205/daf013_1.html) and others (http://www.bizjournals.com/sanfrancisco/stories/2003/03/03/daily28.html) I'm betting the class action lawsuits will come to nothing. Also don't forget LF is suing Mattel for the PowerTouch which LF is saying breaks their patents on the LeapPad. Dilution? Yes. Last year was a big year for that because some of the big owners excercised options. Should be less going forward. LF pays their executives heavily in options, and less in cash, which can be good or bad depending on your viewpoint.* While the company is debt free, The Free Cashflow (TTm) provided by Yahoo.com of 15.39M is low. As I am cash-flow-statement challenged, can someone comment on this ? Using 15.39M, the EV/FCF is 1400/15.39 is 91, compared to 10 for Mattel and 12 for Hasbro and 18 for Jakks. Well the cash for 2003 4th quarter is not collected until the 1st quarter 2004. Also LF spends a lot of money on research and creating new products, being a new company. I bet 2004 cashflow is a lot better than previous years.e. Long Term. I think LF's potential is outside of N.A. Parents are more inclined to spend on kid's educational toys in Asia, especially if the toy is deemed safe and from a branded company. So far, LF does not have a big brand presence in Asia, to me, this is the logical step for growth. Yes international growth seems to be growing right now at a 100% clip. Don't forget about LeapFrog Schoolhouse which is growing at the same rate but has the best margins of all their divisions.-VegasRaab
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