BlackBerry at first blush http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/BullsIgnoreTechsToughReality.aspx
On the surface, it looked as though the company had won at beat the number. In fact, RIMM's receivables grew less than revenue quarter to quarter,
which would appear to be pretty kosher. But receivables were still up mightily year over year. In the past several quarters, RIMM has really
distended its balance sheet, though what we don't know is whether any of the company's receivables might have been factored.
I bring that up because Hickey discovered something I'd missed which may explain
RIMM's ability to meet its own guidance despite apparently struggling to hit the last several quarters' high expectations. Here's what
may be happening:
When RIMM ships one of its BlackBerry mobile devices, the company counts it as revenue. However, if a BlackBerry is not activated,
it probably wasn't sold -- it's in inventory somewhere. Before a year ago, the number of devices that RIMM shipped versus the number it
activated was pretty even, with the difference running south of 50,000 units per quarter, on average. However, over the past three
quarters, the number averaged 200,000 to 250,000. Last quarter it was 200,000.
And then this quarter, RIMM shipped 400,000 more mobile devices than were activated.
Had it not been for those 400,000 devices, the company's earnings growth would have been up only 60% versus the 100% year-over-year
gain it crowed about -- up 40 cents a share, not the 50 cents it reported, from 25 cents a year ago.
It is impossible to determine how long this can continue, but there may be about a million of RIMM's devices now floating in the distribution
channel. Generally, when a channel is being filled with unsold product, margins are weaker because a price incentive usually is required to
get people to take more merchandise than they'd planned on taking. And in fact, RIMM's margins are down 5% year over year.
Back in the old days, when folks actually did research, you'd see the price-earnings ratio for a stock such as RIMM contract, as
Mr. Market began to sense a slowing of the growth rate. But in this day and age of can-you-raise-your-target-price-higher-than-the-next-guy, the multiple goes up even
as the quality of earnings goes down.
The market has become all one trade: Either all stocks are going down together, or
none is going down. From that standpoint, research is pretty much useless.
Momentum now, reality later
I have been wrong on the price action in RIMM for some time. Thankfully,
I own only some long-dated puts on the company, as the environment has been so crazy.
RIMM and the other names I mentioned earlier are completely consumer-dependent.
They've been on a stupendous run, just because they have.
However, when economic reality overtakes these charmed names, they'll come
under horrendous selling pressure. That is why I am focused on their action
as potential barometers for the reversal in stock prices that I expect.