A Short-Term Bet with Insider Buying

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

"Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise." – Peter Lynch

That is why I often follow insider buys quite closely. I expect most of the time, insiders will buy if they think the company is either undervalued, or will experience a certain catalyst in the near future which can drive the company’s share price higher. Currently, the children's educational entertainment company, LeapFrog Enterprises (NYSE: LF), has been bought by several insiders, including the CEO, the CFO, and other directors since November 8. The total purchase value was around $795,500. John Barbour, the CEO, bought 15,000 shares at $7.23 per share, whereas its CFO, Raymond Arthur, bought 12,607 shares at an average price of $7.68 per share. Should investors follow those purchases? Let’s find out. 

LeapFrog makes learning toys and develops several learning platforms for children including LeapPad Explorer and Tag and Tag Junior reading systems. The majority of sales were in the US market, accounting for around 75% of total sales in fiscal 2011. The business had customer concentration on three big retailers including Wal-Mart Stores, Toys “R” Us, and Target. Those three retailers combined for around 64%-65% of the total revenue. LeapFrog is operating in a quite seasonal business. The busiest seasons are normally the third and the fourth quarter, which accounted for around 33% and 46% of total sales, respectively. In terms of operating cash flow, it seems to be highest in the first quarter, as the firm collects receivables from fourth quarter sales. The cash flow from operation is the lowest in the third quarter when receivables have been collected and inventory is stocked for the holiday season in the fourth quarter. 

In the last 5 years, LeapFrog and its peers including Mattel (NASDAQ: MAT) and Hasbro (NASDAQ: HAS) have been performing quite well.

<img src="/media/images/user_14219/screen-shot-2012-11-25-at-10818-am_large.png" />

Mattel seems to be performing the best with more than 76% capital appreciation for its shareholders. LeapFrog and Hasbro are quite similar with around 40%-42%. 

During the same period, the return on equity has been quite consistent with Mattel and Hasbro, whereas LeapFrog has experienced growth of  nearly 25%. Mattel still ranks the first with nearly 31.9%.

<img src="/media/images/user_14219/screen-shot-2012-11-25-at-11249-am_large.png" />

For the trailing twelve months, LeapFrog has delivered a decent return on invested capital, nearly 24.6%, along with the net margin of 10.42%. LeapFrog has a quite strong balance sheet. As of September, it had $266 million in the stockholders' equity, no debt, and $49 million in cash. Currently, the company is trading at $8.44 per share, with the total market capitalization of $570.87 million. The total enterprise value is around $521.44 million. Among the three companies, LeapFrog is the only one, which is debt-free, whereas the D/E of Mattel and Hasbro are 0.4x and 0.9x respectively.

Among the three, LeapFrog doesn’t pay any dividends, whereas Mattel pays to investors a 3.2% dividend yield. Hasbro has the highest dividend yield for investors, of 3.6%. The payout ratio of both Hasbro and Mattel is quite similar, 50.5% and 47.6% respectively.  At the current price, LeapFrog is the cheapest, valued at 11.7x forward P/E and 0.6x PEG by the market. Hasbro is valued at 12.3x forward earnings and 2.4x PEG. Mattel has the highest forward P/E, of 13.1x but a reasonable PEG of 1.5x, lower than that of Hasbro.

My Foolish Take

As the fourth quarter of holiday season is coming, it is when LeapFrog can bring the majority of revenue for the year, along with the strong balance sheet and improving financial performance, I think LeapFrog would be a decent bet for the near future. 




hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of Hasbro and Mattel. Motley Fool newsletter services recommend Hasbro, LeapFrog Enterprises, and Mattel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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