UPDATE: Oppenheimer Starts LeapFrog (LF) at Outperform; Stock Priced Below Cash, Acquisition Target, Says Analyst

Oppenheimer initiated coverage on LeapFrog (NYSE: LF) with an Outperform rating and a price target of $3. Analyst Sean McGowan said the stock turnaround is likely to take time but he noted the stock was priced below cash and said shares could triple with a modest recovery. McGowan also sees the company as a potential acquisition target.

"LF is currently struggling mightily in the face of a collapse of its main product, posting big losses last year (fiscal year ended March 2015) and also expecting big losses in 2016. We believe management has a credible turnaround plan in place, and sufficient financial resources to execute the plan over the next two years. Cash as of June 30 was $1.25 per share and the company is debt-free. We expect cash at the end of the fiscal year to approximate $1.00 per share. Assuming even just a modest recovery by fiscal 2018, we believe the stock could triple," said McGowan.

"LF’s SG&A the past several years has averaged about $84 million per year. We believe that, if LF were part of a larger company, a significant portion of these costs could be eliminated. In addition, sales and gross margins would likely benefit from being run through another company’s proprietary international distribution," continued the analyst.

Gowan added, "With the stock now sporting a negative enterprise value, there may be more interest on the part of potential buyers. Moreover, such a low valuation probably broadens the field of companies or investment groups that could be interested. But the key question remains: what could a buyer do to achieve better results? One “fix” that would go a long way toward restoring profitability would be to reduce costs, and it is likely that this would be much easier for a company with overlapping operations to achieve. Larger toy companies such as Mattel, Hasbro, MGA, Spin Master, Jakks Pacific, Bandai/Namco, Takara Tomy or even LEGO could absorb LeapFrog and greatly reduce many costs."

For an analyst ratings summary and ratings history on LeapFrog click here. For more ratings news on LeapFrog click here.

Shares of LeapFrog closed at $0.98 yesterday.

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