Why LeapFrog Shares Sank

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of childhood education specialist LeapFrog (NYS: LF) were getting held back by investors today, falling as much as 12% despite a strong third-quarter earnings report.

So what: Leapfrog stock opened the day higher but quickly fell into negative territory. Sales for the quarter increased 28%, while EPS jumped 71% to $0.60. The maker of tablets and other electronic children's devices raised its full-year sales guidance to a range of $535 million to $550 million, an increase of about 20% from last year, and its EPS outlook to a range of $0.75 to $0.81 cents, up 150% from 2011. The company also announced that it will continue its partnership with Lions Gate Entertainment (NYS: LGF) to distribute four animated films on DVD starting in 2014.

Now what: The market reaction is certainly puzzling here. Analysts were expecting a profit of just $0.42 per share in the all-important back-to-school quarter but may have been disappointed that the company didn't raise its guidance higher, considering the earnings beat. Wall Street is projecting a $0.51 EPS in the fourth quarter, which would equal an $0.85-per-share profit for the year. Management could be giving a lowball estimate here, though, as it's increasing advertising expenditures 20% to 25% for the holiday shopping season in an effort to ramp up sales, explaining, "Our results for the year will ultimately depend on holiday sell-through of our products." At a P/E of just 12 after today's sell-off, shares look mighty cheap, and a blowout holiday quarter could be in store. This could be a great time to get in.

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The article Why LeapFrog Shares Sank originally appeared on Fool.com.

Jeremy Bowman and The Motley Fool have no positions in the stocks mentioned above. Motley Fool newsletter services recommend LeapFrog Enterprises. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

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