This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

High Expectations Still Hurting Volcano

NEW YORK (TheStreet) -- For all the talk about how management of certain companies will lowball guidance just to beat those expectations, some companies just can't seem to set the bar low enough. And that seems to be the case for cardiovascular imaging company Volcano Corp. (VOLC), which just can't seem to beat its own shadow, much less defeat the likes of Boston Scientific (BSX - Get Report) and St. Jude (STJ - Get Report). But this hasn't been due to a lack of effort.

Volcano's top executives have never been shy about how great they believe their company is. Nor have they ever gone the "conservative route" with respect to future growth targets. The problem has been the execution. And these bold visions -- as much as I appreciate them -- have never manifested into meaningful results.

Consequently, investors have grown frustrated, sending the stock lower by 17% year to date due to (among other things) slowing growth and compressing margins. Complicating matters even more, is that investment fund Engaged Capital, which owns a 5% stake in Volcano, has taken the activism route, trying to force the company's hand to enact a share buyback worth an estimated $200 million. But following another disappointing quarter, it's anyone's guess when Volcano shares will ever erupt -- as attractive as they may appear.

Ahead of the earnings release, Volcano management had warned that the third quarter was going to be another disappointment. As noted, this has become a trend. Not only did this imply the company's sixth earnings miss out of the last seven quarters, but management also pointed to weaker-than-expected fiscal 2014, which immediately sent the stock plummeting 22%. But there were also some particulars in the report that pointed to an ominous future.

The company posted third-quarter revenue of $95.8 million, which represented year-over-year growth of just 2%. For the weak results, management cited (among other things) foreign currency exchange rates. I don't necessarily have a problem with that. To management's credit, on a constant-currency basis, Volcano's intravascular imaging and fractional flow reserve business did perform better, posting growth of 8%.

Likewise, revenue for the company's medical segment, which posted 3% year-over-year reported growth, advanced 9% on a constant currency basis. When digging deeper, the disparity between the reported results and when adjusting for currency rates continues, including the 14% increase in console revenue (constant currency), which was down 1% on a reported basis. But that's the extent to which management deserves a pass for this performance.

What the report also showed was a third-quarter decline of 41% in Volcano's blend of integrated consoles. This compares to combined 60% decline in the August and May quarters. Now I don't want to make more out of this than their needs to be, especially since management is still posting strong results in the IVUS business, especially in the U.S. and Europe.

However, I have to wonder if management, which is still fighting a credibility crisis, wouldn't be better served by focusing less on the consoles business and devote more attention to the disposables segment. It's true that disposables were a bit weak this quarter, but not only was that segment up 4% in constant currency, but the 30% growth in peripherals was certainly a surprise.

In that regard, I believe Volcano still has some opportunities to turn this ship around. And contrary to what some skeptics may believe, there is no clear evidence that management is losing market share to either St. Jude or Boston Scientific. While there continues to be worries about pricing pressure in the IVUS segment, the fact that Volcano was able to advance gross margin by 60 basis points this quarter, suggests that these fears were overblown.

All of that said, Volcano is far from a flawless company -- let me make that clear. I believe management's bravado and what has been a "brash forecasting style" has been the company's worst enemy. But if fiscal 2014 guidance serves as any indication, things are changing. And while I do see these shares as undervalued today, I'm not ready to touch the stock with my own money -- at least not until management ends this streak of underperformance.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
BSX $22.00 0.36%
STJ $76.30 0.13%
VOLC $17.99 0.06%
AAPL $93.64 -0.11%
FB $118.57 0.84%


Chart of I:DJI
DOW 17,891.16 +117.52 0.66%
S&P 500 2,081.43 +16.13 0.78%
NASDAQ 4,817.5940 +42.2360 0.88%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs