The Motley Fool: The lowdown on ‘stuffing the channel’

Q: What does “stuffing the channel” mean?

A: If a company inflates its sales numbers by shipping more products than can be sold through its distribution channels, it’s stuffing the channel.

Companies often record sales as soon as they ship products, so shipping goods ahead of schedule makes it seem that business is booming. This can result in many unsold products being returned to the manufacturer, so sales that were already claimed never actually occur. This is an illegal way for companies to “cook the books,” and some executives have gone to prison for it.

When a company’s accounts receivable are growing faster than sales, that indicates possible channel stuffing. One way to check for it is to calculate a company’s “days sales outstanding” (DSO): Divide accounts receivable by sales (sometimes referred to as revenue), and then multiply the result by the number of days in the period (often 91 for a quarter, or 365 for a year). This reveals how many days’ worth of sales are represented by the current accounts receivable. Between 30 and 45 days is typical.

A company with a low DSO is getting its cash back quickly and, ideally, putting it immediately to use, getting an edge on its competition. Rising numbers can signify channel stuffing. This doesn’t work in every industry, though: Cash-based businesses such as restaurants, for example, don’t usually have much in the way of receivables.

A: Block trades are large orders to buy or sell stocks or bonds at a price agreed upon by two parties, such as hedge funds or pension funds. They typically involve at least 10,000 shares of stock or $200,000 worth of bonds.

Dear Fool: Without a doubt, my most regretted investment move was not placing a stop-loss order for the mutual funds in which I was invested when the market was roaring ahead in the late 1990s. I was caught up in the euphoria of the long-running bull market; I never thought of disciplining myself to get out of funds that dropped by 10% and to stay in cash while the market continued its down slide. If I had, I’d have been able to buy into some great funds that had fallen and would rebound nicely.

The Fool responds: Remember that hindsight is 20/20. You’re wishing that you’d engaged in “timing the market” — getting into stocks before they soar and then out of them before they drop — but that’s not something easily accomplished.

It’s fairly certain that the economic environment will alternate between bull markets and bear markets, but no one knows beforehand just when such periods will start and stop (though some pundits occasionally guess correctly).

Also, because of the way that mutual funds work, you can’t place stop-loss orders for them, expecting your broker to sell your shares if they fall to a set level during the day.

Mutual-fund shares don’t fluctuate during the trading day. You can get around that limitation by investing in solid exchange-traded funds (ETFs), which are like mutual funds, but trade like stocks.

Wall Street didn’t like what it saw from the first-quarter earnings report of iRobot (Nasdaq: IRBT), maker of robotic Roomba vacuums, Braava mops and Terra lawn mowers. After revenue missed analysts’ expectations in late April, the market punished the stock, sending shares tumbling 23%. Long-term investors might want to treat this dip as a buying opportunity, though.

For one thing, revenue actually grew in the quarter by 9% year over year, and earnings surpassed expectations. Management noted stronger-than-expected demand for the high-end i7 and i7+ Roomba models in the U.S., despite recent price increases to help offset the impact of tariffs. It also touted a “very successful” launch during the quarter for the i7 and i7+ in the EMEA (Europe, Middle East and Africa) region, Japan and China.

The recent stock-price drop has had shares trading near a price-to-earnings (P/E) ratio of 29, well below the five-year average of near 35.

IRobot has a massive addressable market — robotic vacuums recently controlled only about 23% of the high-end vacuum market — and plenty of room to grow. Its more than 200 U.S. patents and more than 400 international patents can further fuel innovation.

For investors who know enough to look beyond Wall Street’s overreactions and into the business’s fundamentals, iRobot looks like a great growth stock, especially at this price. (The Motley Fool owns shares of iRobot.)

Source: Seattletimes.com

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