Here's How Research In Motion May Be Failing You

Margins matter. The more Research In Motion (Nasdaq: RIMM  ) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. Healthy margins often separate pretenders from the best stocks in the market. That's why we check up on margins at least once a quarter in this series. I'm looking for the absolute numbers, so I can compare them to current and potential competitors, and any trend that may tell me how strong Research In Motion's competitive position could be.

Here's the current margin snapshot for Research In Motion over the trailing 12 months: Gross margin is 38.6%, while operating margin is 15.2% and net margin is 11.2%.

Unfortunately, a look at the most recent numbers doesn't tell us much about where Research In Motion has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months, the last fiscal year, and last fiscal quarter (LFQ). You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for Research In Motion over the past few years.

Source: S&P Capital IQ. Dollar amounts in millions. FY = fiscal year. TTM = trailing 12 months.

Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them. To compare quarterly margins to their prior-year levels, consult this chart.

Source: S&P Capital IQ. Dollar amounts in millions. FQ = fiscal quarter.

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 54.6% and averaged 48.1%. Operating margin peaked at 28.8% and averaged 25.3%. Net margin peaked at 21.5% and averaged 18.6%.
  • TTM gross margin is 38.6%, 950 basis points worse than the five-year average. TTM operating margin is 15.2%, 1,010 basis points worse than the five-year average. TTM net margin is 11.2%, 740 basis points worse than the five-year average.

With recent TTM operating margins below historical averages, Research In Motion has some work to do.

If you take the time to read past the headlines and crack a filing now and then, you're probably ahead of 95% of the market's individual investors. To stay ahead, learn more about how I use analysis like this to help me uncover the best returns in the stock market. Got an opinion on the margins at Research In Motion? Let us know in the comments below.

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. 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 (5) | Recommend This Article (1)

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  • Report this Comment On January 13, 2012, at 12:30 PM, eyadm wrote:

    You can't only look at net profit margin to evaluate if a company is in good financial health. If you look at RIM's financials you will notice that they have in increase in sales from the last quarter by 24%, their smartphone shipment is up by 33%, subscribers are up 33%, and most importantly, they hold no debt and have billions worth in pattents. They did have a tough time with the sale of their playbook but that only counts for 8% of what the company sells. In my opinion, the stock is underpriced.

  • Report this Comment On January 13, 2012, at 2:21 PM, infektu wrote:

    InfoThatHelp, you talk to yourself.

    You rarely understand anything from any article you comment on

    And you are biased :-)

    Oh, btw, between the two "slow" quarters there was a good one, up 35%.

    RIM sits on 1.5bn cash and makes about 600M a quarter net.

    You should worry about your own finances.

  • Report this Comment On January 13, 2012, at 3:00 PM, jelp2 wrote:

    The next couple quarters may be slow due to the anticipated BB10 devices slated for later this year. People dont want to be locked in to a new two year contract with these phones on the way. Im definitely waiting.

  • Report this Comment On January 13, 2012, at 8:05 PM, melegross wrote:

    Infectu, don't blame someone here for the fact that RIM's condition is deteriorating. RIM is in a perilous position right now. Marketshare is way down. Sales have been faltering. All margins are down. The Playbook bombed. Blackberry 10‘s delay has shocked everyone. And they now say there will be only one BB10 phone, rather than the three models they were promising.

    All in all, a big problem for them.

  • Report this Comment On January 13, 2012, at 8:08 PM, melegross wrote:

    Jelp2, hate to burst your bubble, but Rim recently announced that there will no longer be three BB 10 devices late this year, two quarters after they promised, but just one .

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