LeapFrogging in the Wrong Direction, for Now

NEW YORK (TheStreet) -- Technology-based learning company LeapFrog (LF) lived up to its name yesterday and took a leap. Unfortunately for shareholders, it was a leap in the wrong direction.

In an early January column, I reported the company's re-emergence on one of my deep-value stock screens. The stock had recently pulled back, as the company reduced expectations for its fourth-quarter earnings release.

On Wednesday, after the market closed, the company announced those results. The markets slapped LeapFrog with a 9% haircut that drove shares to a two-year low.

The fourth quarter was much worse than expected, with revenue falling to $186.7 million, down almost 24% from the same quarter a year earlier. More importantly, the result was also well below the $216 million consensus estimate. Earnings per share, without a $63.6 million tax benefit, were break-even, well below the 14 cent consensus estimate.

LeapFrog management blamed the results on the shortened holiday shopping season, discounting by retailers and the inability to keep key products in stock. It appears as though management's previous warnings were a bit too optimistic.

The other dose of bad news was the resulting increase in inventory and lowered guidance for 2014. The company now expects revenue for the year to be in the $554 million to $580 million range and earnings in the range of 18 to 25 cents per share.

As disappointed as the markets were with these results, there are still some positives. Especially in light of the depressed stock price, I think the position in LeapFrog I established late yesterday is warranted. The company ended the quarter with $168 million, or about $2.40 per share, in cash and no debt.

Despite a $14 million increase in inventories since the fourth quarter of 2012, the company's balance sheet is actually stronger. Shares now trade at just 1.09 time tangible book value per share.

Leave it to a deep-value investor to buy when most others are selling.

LF Chart
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