Analysts jump on Leapfrog

Piper Jaffray initiated coverage of Recommended List selection LeapFrog (LF), starting the stock with an "overweight" rating. Analyst Stephanie Wissink placed an $11 price target on the stock.

Meanwhile, Roth resumed coverage of the infant and juvenile industry today, and analyst Dave Kingc called LeapFrog their "top pick" and offered a $12 per share price target.

Wissink wrote, "We think shares present a compelling investment opportunity at current levels.  Earnings power nears $1.00, implying a severely discounted multiple for a company with strong brand equity."

In her note, the analyst pointed to increasing birthrates and strong brand equity of the LeapFrog brand. On the former point, Wissink sees current infant/baby and preschool demographic trends as conservatively adding two to three percentage points of incremental growth.

On the latter point, she wrote: "There is tremendous brand equity and trust among the purchasing consumer, which we think the company can leverage to regrow its revenue base."

At Roth, King wrote: "In evaluating different Infant & Juvenile industry stocks, we see LeapFrog as the top pick in the category due to its leading brand position, growing content sales, and strong cash generation"

He added, "We expect it will continue to benefit from a secular trend toward better education and a significant 'English as a Second Language' opportunity."

In our view, as the top brand in toddler educational toys and content, LeapFrog is well positioned to take advantage of the industry tailwind. Kids are increasingly becoming tech savvy at younger and younger ages, and LeapFrog's products and digital content play into this trend.

LeapFrog shares have been hot recently, but the stock still remains inexpensive, trading at around 9.5x the 2014 consensus, excluding its nearly $3.00 per share in net cash. The company has been executing well, and it has a very strong brand. While competition is increasing, LeapFrog's content helps separate it from rivals.

International expansion, especially in the English-as-a-second-language field, is a nice potential growth area, and birthrate trends mentioned by Piper Jaffray are also a notable driver. The company is also a strong free cash flow generator, and has a rock solid balance sheet, with about 30% of its enterprise value in cash.

If LeapFrog can convince investors that it's an educational content company and not a "kiddie tablet" maker, then it is likely to command a much higher multiple than it currently has.

We also think the company could make an attractive takeout candidate for a large toymaker like Hasbro or Mattel, as well as private equity. We continue to rate the stock a "Buy" with a $12 target.