Is R.R. Donnelley & Sons Going to Burn You?

There's no foolproof way to know the future for R.R. Donnelley & Sons (Nasdaq: RRD  ) or any other company. However, certain clues may help you see potential stumbles before they happen -- and before your stock craters as a result.

A cloudy crystal ball
In this series, we 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 -- the number of 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 onto 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, at times, 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 R.R. Donnelley & Sons 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 R.R. Donnelley & Sons sending any potential warning signs? Take a look at the chart below, which plots revenue growth against AR growth, and DSO:

Source: S&P Capital IQ. Data is 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 indicates a trend worth worrying about. R.R. Donnelley & Sons's latest average DSO stands at 73.0 days, and the end-of-quarter figure is 74.7 days. Differences in business models can generate variations in DSO, and business needs can require occasional fluctuations, but all things being equal, I like to see this figure stay steady. So, let's get back to our original question: Based on DSO and sales, does R.R. Donnelley & Sons look like it might miss its numbers in the next quarter or two?

The raw numbers suggest potential trouble ahead. For the last fully reported fiscal quarter, R.R. Donnelley & Sons's year-over-year revenue shrank 6.5%, and its AR dropped 0.3%. That looks OK. End-of-quarter DSO increased 6.7% over the prior-year quarter. It was up 6.7% versus the prior quarter. 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.

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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. The Motley Fool has no positions in the stocks mentioned above. 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 (2)

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  • Report this Comment On January 07, 2013, at 10:32 AM, kurtdabear wrote:

    The people most likely to get burned on RRD during the coming year are the shorts. (Long RRD)

  • Report this Comment On January 09, 2013, at 5:23 PM, mikey5545 wrote:

    RRD =ERON,AOL OPEN -OPEN RRD BOOKS UP AND FIND OUT THEY DONT HAVE ALL THE FUNDS OR WHAT THEY SAID THEY HAVE >? I SOLD MY STOCKS A LONG TIME AGO !

  • Report this Comment On January 09, 2013, at 5:30 PM, mikey5545 wrote:

    rrd bought up so many printing contracts..really cheap,all these years....now its cathing up ! sounds like a company ?that thought they wouldnt find out ? maydoff anyone .......

  • Report this Comment On January 09, 2013, at 9:23 PM, mikey4555 wrote:

    if you make printing products and only get a million dollars for makinf this but add all the bills..it cost 2 million dollars. so for each printing item they make RRD, where is the profit at in the long run ?open rrd books and they see neg profit income .

  • Report this Comment On January 23, 2013, at 7:51 AM, Lordrobot wrote:

    RRD is a dumb company. They are setting up a firewall and buying back stock to prevent the shorts from coming at them. The Dividend is unsustainable their debt picture is abysmal.

    At present they lifted the stock from just below 9 with the old Buffett buyback gimmick. Since this is one of the most shorted companies this caused some shorts to clear bring the stock up to about $10.

    Revenues are dropping and margins are dropping. There is not one segment of their business which isn't commodity and easily taken by a smaller specialist firm. The board continues to stupidly stick to the insane dividend instead of cutting it to under 2%.

    Most recently it is closing printing shops and just Axed 47 workers at Greenville.

    RRD is an old styled firm with a Dead Board of Directors that is driving the company into the ground and setting up shares for a bond takeover and eventual reorganization. This is the way its done. This is a fakey enticement to lure shareholders into the jaws of death with the fantasy of a high yield dividend. But folks, look at the books and look at the debt. This company is on the way out.

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