Are Shorts Watching Research In Motion?

There's no foolproof way to know the future for Research In Motion (Nasdaq: RIMM  ) 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 -- 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 into 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 Research In Motion 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 Research In Motion 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 are 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

 Research In Motion $4,621 58
 Apple (Nasdaq: AAPL  ) $20,343 20
 Hewlett-Packard (NYSE: HPQ  ) $33,278 47
 Motorola (NYSE: MOT  ) $4,890 65

Source: Capital IQ, a division of Standard & Poor's. DSO calculated from average AR. Data are 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 Research In Motion miss its numbers in the next quarter or two?

The numbers don't paint a clear picture. For the last fully reported fiscal quarter, Research In Motion's year-over-year revenue grew 31.1%, and its AR grew 36%. That looks OK. End-of-quarter DSO increased 3.8% over the prior-year quarter. It was up 11.2% versus the prior quarter. That demands a good explanation. 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. Apple is a Motley Fool Stock Advisor recommendation. The Fool owns shares of Apple. 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.


Read/Post Comments (4) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 03, 2010, at 9:17 AM, sk8ertor wrote:

    Does FOOL ever write a positive article on RIM or do they all have to be negative article promoting the short selling of RIM? FOOL must be a heavy short seller of RIM and this is why they keep writing such ridiculous articles on a healthy and profitable company that is GROWING and INCREASING sales. Shame on FOOL!

  • Report this Comment On December 03, 2010, at 9:52 AM, mattmcneil wrote:

    You're right sk8ertor, it's hilarious. Not sure if they have to disclose shorts or not. But the company is definitely long Apple so anti-RIM articles are inherently pro-Apple. Whatever happened to the old Fool mantra of "buy solid companies with super clean balance sheets still growing at breakneck speed that the market has fallen out of love with". Guess it got thrown out the window when the company started being a bunch of short term traders talking up the company book.

    My favorite part:

    "The numbers don't paint a clear picture. For the last fully reported fiscal quarter, Research In Motion's year-over-year revenue grew 31.1%, and its AR grew 36%. That looks OK."

    YoY Revenue growth of 31.1%. Yep. That's "OK" I suppose. Still, not a very "clear" picture. Hilarious.

  • Report this Comment On December 03, 2010, at 3:30 PM, allive wrote:

    Fool is a joker with an evil intent. They are not interested in educate the american public for the greater good of society, but rather they are out there to push the public to buy apple fueled by their investment interests. Each fool report is totally biased against RIM.

    Let me reiterate in agreement that only a fool will believe Fool and SHAME ON FOOL!

  • Report this Comment On December 03, 2010, at 4:01 PM, dexter1225 wrote:

    So revenues increase 31% and A/R increases 36%... My boss would love that over here...

    There are sooooo many reasons a company may carry balances on their A/R, and many of them are external. I actually think it's quite impressive that their revenues can increase by 31% and with that increased customer base/sales dollars/volume/etc..., RIMM's A/R department can keep up! It's REALLY impressive, in my opinion.

    And to follow-up on the "RIMM negative press/authors long AAPL" comment: Why don't you show us the SAME analysis for Apple?

    Thanks!

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