There's no foolproof way to know the future for Motorola
Our crystal ball
I often use accounts receivable (AR) and days sales outstanding (DSO) to judge a company's earnings health and future prospects. Alone, AR -- the amount of money owed the company -- and DSO -- days worth of sales owed to the company -- don't tell you much. By considering the trends in AR and DSO, you can get a window onto the future.
AR that grows more quickly than revenue, or ballooning DSO, can suggest a desperate company that's trying to boost sales by giving its customers overly generous payment terms. Or, 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 Motorola do this? 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 Motorola sending any 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 calculated DSO uses average accounts receivable. I prefer to look at end-of-quarter (EOQ) 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 |
|---|---|---|
Motorola | $5,414 | 59 |
Qualcomm | $2,706 | 25 |
Arris Group | $280 | 45 |
Harris | $1,330 | 45 |
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 Motorola miss its numbers in the next quarter or two?
I don't think so. AR and DSO look healthy. For the last fully reported fiscal quarter, Motorola's revenue shrank 1.5% year over year, and its AR dropped 8.7% in the same period. That looks OK. End-of-quarter DSO decreased 9.5% over the prior-year quarter, but it was up 4.1% versus the prior quarter.
Still, I'm no fortuneteller, and these are just numbers. Investors putting their money on the line always need to draw their own conclusions. How you play it is up to you.
What now?
I use this kind of analysis to figure out which investments I need to watch more closely, or avoid altogether, in my never-ending quest to find the home run stock you're too afraid to buy. 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.
My colleague John Del Vecchio, CFA, has made a career out of using analysis like this to spot companies about to fall, then shorting them before the market gets wise. It's just one of many tools he employs as he digs through financials. If you want to learn more about how he does it, check out his free report.
