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Actionable news in LF: LEAP FROG ENTERPRISES Inc CLA,

LeapFrog: Is The Price Reflective Of Reality?

Summary

Factoring in another inventory write-down, we estimate current liquidity to last for six quarters.

Green shoots are emerging, which remain overlooked chiefly due to the recent troubles.

We believe LF warrants a market cap of $125 million ($2.50/share), supported by extremely conservative estimates.

For the past several years, we have witnessed the shares of LeapFrog (NYSE:LF) fall into an abyss as sales almost got cut in half from the levels reached in 2012. Fast-forward to the fall of 2015, LF sits at a market cap little shy of $50 million, with cash and equivalents at $88.2 million, implying a negative enterprise value. The stock now appears on several screeners but gets labeled as a 'trap', after many who called it a value stock at higher price levels saw their thesis discredited.

We don't question investor skepticism, which seems warranted after the big losses posted but can't resist asking ourselves "What else can go wrong from here?" Before we dig into it any further, it seems warranted to take a peek at the view Mr. Market holds for this company.

  1. The company has failed to react to a market that saw a flood of tablet devices entering the marketplace loaded up with substitute or replacement for its products.
  2. Unreasonable pricing relative to its peer products led to the market share losses which is difficult to reverse in this competitive market.
  3. The company continues to bleed cash without a credible plan to stem this burn rate.
  4. Off-balance inventories symptomatic of looming inventory impairment if CY15 holiday sales fail to meet expectations.
  5. Inept management fixated on an out-of-date razor blade business model, and can't be trusted to execute well to right the ship after several snafus.

These views above, we believe, cover broadly held opinions on LeapFrog's stock. Undoubtedly, this is a time of tremendous uncertainty clouding its business - but no more so than in the past, we thought. For example, LeapFrog saw its revenues drop by a similar scale from $650 million in 2005 to $380 million in 2009. Under such circumstances, we propose holding no view seemingly is the prudent view. On the other hand, if the company survives, plenty of surprises could appear on the upside. It appears analyzing "how much can we lose" is more value-add as opposed to forecasting what LF could be doing in a year or so from today and this holds the key to success.

Liquidity

From a liquidity standpoint, LF had C&E of $88 million with borrowing availability of $75 million on a revolver totaling $163 million. Analysts...


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