True Sportswear at a Bargain Price

Volcom (VLCM) designs, markets, and merchandises clothing and accessories for use in surfing, skateboarding and snowboarding. The company sells through about 4800 locations as well as online. 16 units are company owned outlets with the rest primarily specialty shops catering to board sport enthusiasts.

The company was founded in 1991 and came public on June 29, 2005 with an offering at $19.00/share. Since its public debut, each full year has shown record sales, cash flow, earnings and book value. With less than one month to go in 2008, it is likely to continue the streak. September quarter EPS results came in at $0.67 this year versus $0.59 in 2007.

Here are Volcom's per share numbers since coming public in 2005:

Year …... Sales ….. C/F ….... EPS …... B/V ….. Avg. P/E

2005 ….. $6.61 …. $1.00 .… $1.08 …. $4.24 ….. 28.3x

2006 ….. $8.45 …. $1.24 …. $1.18 …. $5.52 ….. 26.0x

2007 …. $11.03 … $1.49 …. $1.37 …. $7.10 ….. 26.7x

2008*.... $14.10 … $1.70 …. $1.43 …. $8.73 ….. 13.6x

2008 figures include Q4 consensus estimates.

With the economy in a funk, it is expected that the fourth quarter will come in well under last year's and the $1.43 estimate reflects this. At today's quote, VLCM shares trade for less than 6.5x this year's estimate - an all-time low valuation and about a 75% discount to VLCM's own multiple from its first three years as a public company.

Volcom is debt free and had more than $73.3 million in cash as of September 30, 2008 with only 24.37 MM shares outstanding. That's over $3.00 net cash per share on this $9.23 issue.

While the poor US economy is likely to hold growth in check for the near term, the extraordinarily low valuation seems to more than reflect this.

Even 12 times this year's $1.43 estimate leads to a target price of $17.16 or 86% above today's price. Volcom has historically traded much higher levels.

These shares hit peak prices of $37.80, $41.40, $51.00 and $28.90 in the years 2005 through 2008 respectively.

VLCM's price/cash flow and price/book value ratios have never been this low until the past few weeks.

Value Line looks for Volcom to return to a normalized P/E of 18 over the three – five year horizon. They also look for EPS to expand to $2.40 - $2.60 over that same time span.

With $3/share of cash, no debt and over $8.32/share in tangible book value, I see little risk in holding these shares and plenty of upside. Volcom represents a true growth stock at a non-growth valuation.

Disclosure: Author is long VLCM shares and short VLCM puts.

Comments

[Dean Morel:]

Paul, thanks for the good summary on VLCM. It does look to have an excellent reward/risk profile at current prices. I wish the Woolcott's would stop selling shares. While their sales are a small percentage of their holdings, they do total to around 10% this year.

2008 Dec 15 07:31 AM