Volcom Surfs Against the Tide

Editor's note: This article has been expanded to provide additional clarification regarding Volcom's accounts receivable and inventory increases.

Volcom (Nasdaq: VLCM) has had a tough time lately, but its fourth-quarter results have some investors convinced that it's getting back on the board.

The company's fourth-quarter net income decreased by 6.8% to $7.1 million, or $0.29 per share. On the other hand, revenue increased by 22% to $69.1 million.

A quick glance at Volcom's balance sheet reveals some interesting food for thought for investors. For example, accounts receivable burgeoned by 70.5%, and inventories increased by 55%; given that both are growing more rapidly than sales, both these factors are red flags that bear watching.

(Please note that Volcom's European expansion was not a factor in 2006. In its conference call, Volcom revealed that of the $24.1 million in accounts receivables for 2007, $15.6 million related to its European operations. The inventories increase also included $6.3 million in incremental inventory related to Europe.)

On a more positive note, Volcom generated $4.3 million in free cash flow for the year, although that's down from the $11.9 million in free cash flow it generated this time last year.

For conservative investors, Motley Fool Hidden Gems pick Volcom is arguably a tough call right now. Consumers are facing tough times (although board-sport-obsessed teens might be better insulated than most). Some of Volcom's retail customers have suffered lately -- fellow Motley Fool Hidden Gems pick Zumiez (Nasdaq: ZUMZ) has come down from its headier times, while Pacific Sunwear (Nasdaq: PSUN), a Motley Fool Stock Advisor recommendation, by the way, has several years of struggling under its belt. 

I still believe in Volcom's brand, and the company's future growth potential. Volcom doesn't just market to the board-sports culture; it participates, via competitions, music, and film, giving the company a better understanding of its target audience. It's also expanding in Europe and opening its own retail stores.

I think all these factors make the stock especially tantalizing right now. Furthermore, analysts expect Volcom to post 24% growth over the next five years, and with its shares down 42% over the past year, its PEG ratio now rests at just 0.48.

Of course, 2008 probably won't be an easy year for any company out to separate consumers from their hard-earned dollars. Investors in Volcom will have to stick to their convictions regarding its long-term operational and competitive strength.

Catch a wave toward further Foolishness:

• All aboard Volcom?
• I think Volcom's a Black Friday Bargain Stock.