VLCM...again

Volcom, traded down all week after reporting guidance that was below estimates for 2006. Piled on that the company was downgraded by a few research companies. So now the stock sits at $31.8 down from $40.0 on week ago a substantial 20.5% loss for the week. Now I have to admit that I am not as excited about this stock as I was a week ago when I bought it into earnings (purchased a small position); however, having gone over everything I could find on this company in the past few days, I have to believe that the stock is not a sell around here and I will add to it again substantially around $30 if it gets there and here is why:

First off, working against the stock you have momentum buyers who are bailing like there is no tomorrow, which is understandable because that is what they do. Secondly, you have the appearance of a lack of earnings growth in 2006. Now, if VLCM was doing well and growing earnings and sales at 25% this year, I have to believe that the stock would be much higher than it is now. As it is, the earnings are projected to stay relatively flat compared to 2005 and sales should grow around 25%, again not exactly the ratio you are looking for when buying a growth company. So you are left in quite the quandary, you are holding a growth stock that doesn’t grow. Now this problem is compounded by the fact that the company is in a license agreement with its European business and therefore has a cap on the revenue growth from that channel.

So basically why would anyone hold this stock?

Well let me tell you why I am. First of all, I believe the company is in the right market and has an exceptional product. But that won’t drive the stock, so it really doesn’t matter. One of the major concerns with the research coming out on the company is that inventories are growing faster than sales. In my opinion that is a somewhat irrelevant concern at this point in the company’s life cycle, it just came public and it will take a while for inventory issues to settle out. Another significant bearish argument is that VLCM’s investment in Europe (which will reduce EPS by $0.06) is bad purely because it will lower EPS this year. While this is true I think that the main bullish argument I can make for this stock is that in 2007 the company should grow earnings by somewhere close to 30.0% leaving the slow growth in 2006 as more of an anomaly that anything else. Furthermore, I believe that the company will have a better than expected impact from its European business once it takes over. I would like to see revenue in Europe should contribute $40-45 in 2007 assuming that VLCM takes outright control and sales grow 25% annually for the next 2 years. This would force estimates to be ratcheted up and with them, the stock.

Another note I found to be interesting with some of the research was that many of the companies admitted to not accounting for stock option expense in their previous models. Now that implies that consensus forecast should have only been $1.14 for the year.

Even though I hate to admit it I feel that this stock will be dead money until late Q2 or possibly later in the year, and I would not aggressively pursue a sizeable position at this time. But I have to believe that the $1.12, high end of guidance is way too conservative for this company. I don’t believe that they will not be able to leverage SG&A at all during the year, it simply won’t happen that way. If I were an analyst modeling this company I would peg year end EPS to be over $1.16. Will that extra $0.04 make a difference, I don’t know, the only thing I am concerned with is that once people figure out the full impact of the 2007 growth the stock should shoot up like wildfire. Because the you see, it will meet the buying criteria for the growth guys and they will find an attractively priced stock selling at its growth rate (compared to PE) and then “say you know what that seems like a good idea buy VLCM”

Unfortunately for me I am early to the party, but willing to wait for the other guests to arrive. But this can’t help but remind me of a quote I have up in my office from the Financial Analysts Journal: “Being too far ahead of your time is indistinguishable from being wrong.”

Exercise patience and good luck to all.

Key dates to watch out for because they will effect VLCM: 2-28 PSUN reports, 3-15 ZUMZ reports, around march 10th ZQK reports (people might try to exrapolate what happens there to VLCM, although I feel ZQK is not a good company and in fact losing share to VLCM)