Is Volcom Going to Burn You?

There's no foolproof way to know the future for Volcom (Nasdaq: VLCM  ) or any other company. However, certain clues may help you see potential stumbles before they happen -- and before your stock craters as a result. Rest assured: Even if you're not monitoring these metrics, short-sellers are.

A cloudy crystal ball
I often use accounts receivable and days sales outstanding to judge a company's current health and future prospects. It's an important step in separating the pretenders from the market's best stocks. Alone, AR -- the amount of money owed the company -- and DSO -- the number of days' worth of sales owed to the company -- don't tell you much. However, by considering the trends in AR and DSO, you can sometimes get a window onto the future.

Sometimes, problems with AR or DSO simply indicate a change in the business (like an acquisition), or lax collections. However, AR that grows more quickly than revenue, or ballooning DSO, can also suggest a desperate company that's trying to boost sales by giving its customers overly generous payment terms. Alternately, it can indicate that the company sprinted to book a load of sales at the end of the quarter, like used-car dealers on the 29th of the month. (Sometimes, companies do both.)

Why might an upstanding firm like Volcom do this? For the same reason any other company might: to make the numbers. Investors don't like revenue shortfalls, and employees don't like reporting them to their superiors.

Is Volcom sending any potential warning signs? Take a look at the chart below, which plots revenue growth against AR growth, and DSO:

Source: Capital IQ, a division of Standard & Poor's. Data is current as of last fully-reported fiscal quarter. FQ = fiscal quarter.

The standard way to calculate DSO uses average accounts receivable. I prefer to look at end-of-quarter receivables, but I've plotted both above.

Watching the trends
When that red line (AR growth) crosses above the green line (revenue growth), I know I need to consult the filings. Similarly, a spike in the blue bars (DSO) indicates a trend worth worrying about. As another reality check, it's reasonable to consider what a normal DSO figure might look like in this space.

Company

LFQ Revenue

DSO

 Volcom $79 87
 V.F. (NYSE: VFC  ) $2,126 40
 Under Armour (NYSE: UA  ) $301 42
 Quiksilver (NYSE: ZQK  ) $426 71

Source: Capital IQ, a division of Standard & Poor's. DSO calculated from average AR. Data is current as of last fully-reported fiscal quarter. LFQ = last fiscal quarter. Dollar figures in millions.

Differences in business models can generate variations in DSO, so don't consider this the final word -- just a way to add some context to the numbers. But let's get back to our original question: Will Volcom miss its numbers in the next quarter or two?

The numbers don't paint a clear picture. For the last fully reported fiscal quarter, Volcom's year-over-year revenue grew 22.4%, and its AR grew 23.7%. That looks OK. End-of-quarter DSO increased 1.1% over the prior-year quarter. It was up 8.3% versus the prior quarter. Still, I'm no fortuneteller, and these are just numbers. Investors putting their money on the line always need to dig into the filings for the root causes and draw their own conclusions.

What now?
I use this kind of analysis to figure out which investments I need to watch more closely as I hunt the market's best returns. However, some investors actively seek out companies on the wrong side of AR trends in order to sell them short, profiting when they eventually fall. Which way would you play this one? Let us know in the comments below, or keep up with the stocks mentioned in this article by tracking them in our free watchlist service, My Watchlist.

Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. Under Armour is a Motley Fool Rule Breakers choice. Under Armour and Volcom are Motley Fool Hidden Gems selections. The Fool owns shares of Under Armour and Volcom. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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  • Report this Comment On April 28, 2011, at 4:38 AM, helloyall wrote:

    good point, however, look at the debt outstanding. plus, the cash outstanding. according to yahoo, the company has $92million of cash, only $42,000 of debt, AND they make money! that gives VLCM a long time to operate. actually, their capital structure is wrong. they need to increase debt and buy back stock. if they don't, they will be a great takeover target.

    VLCMis a great brand that my whole family wears. it's not like generic quicksilver or billabong. there's lots of room for expansion in this space. i just wish the guys running it would think a little bit bigger...

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