Imperial Capital was out with a bullish note on LeapFrog (LF) after its analysts met with management in Los Angeles.
"LeapFrog has a relatively new management team that has altered its strategy from being primarily a toy company to an emphasis on becoming the leading educational entertainment content provider," analyst Lee Giordano wrote. "Its singular focus on educating kids in the 3-8 year old age range represents an attractive market niche."
The analyst is looking for high-digit sales growth and for margins to improve after this year due to a greater emphasis on software and from sales leverage. Giordano noted that the company should support over 800 pieces of content by the end of this year. Giordano has an "outperform" rating and $13 price target on the stock.
The key for LeapFrog at this point is trying to convince investors that it's an educational content company and not a toy company riding one strong product, which in this case is the LeapPad tablet. Management clearly believes this, and is working to bolster its content both on the LeapPad and off it.
Nonetheless, in the near term, the success of the LeapPad and related content for the device is going to drive sales, and on that front, we remain positive that it will continue to be the No. 1 selling kiddie tablet in the U.S. given the great lengths it goes to provide both educational and entertaining content for children, all of which is developed or selected by a qualified child development expert.
The international market is a good potential growth opportunity, and we concur that ESL could be a big market. Many countries around the world teach English at an early age, so this could be a pretty big market.
LeapFrog is still going to have to change investor perception, but if it can, then this is a very cheap stock that has a lot of room to the upside.
We also think it could be an attractive takeover candidate for a larger toy company like Mattel or Hasbro, as well as private equity. We rate LeapFrog a "Buy" with a $12 target.
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