LeapFrog Is Priced Below Cash Value: What It Means

In a report published Thursday, Oppenheimer analyst Sean McGowan initiated coverage of LeapFrog Enterprises, Inc LF with an Outperform rating and $3 price target.

McGowan said that the collapse of LeapFrog's main product Leap Pad, which was a children's educational tablet, had dealt the company a big blow and resulted in significant losses in FY15.

Although the company was expected to continue posting big losses in 2016, the management had a credible turnaround plan in place and had sufficient financial resources to execute it over a two-year period, McGowan mentioned. Moreover, LeapFrog was debt-free and had cash worth $1.25 per share, as of June 30.

In the report Oppenheimer noted, "LF has experienced sharp rises and falls in sales and profits several times in its 20-year history, and we believe it has been able to rebound because consumers see LF as a trusted source of educational products. Cost cutting and new product introductions should spur the turnaround."

McGowan believes that LeapFrog's shares were priced below net cash per share, implying that the company had negative enterprise value. "While investor skepticism seems warranted given weak results and prospects for F2016, we believe that, if a turnaround appears to be working and the company can post positive adjusted EBITDA in F2017, LF share price could triple."