Foolish Forecast: Nile's Tide Comes In

Surf's up, investor dudes. It's time to ride the Blue Nile (Nasdaq: NILE) wave. The leading purveyor of ice over the Internet is set to release Q4 and full-year 2005 earnings tomorrow afternoon.

Wall Street Wisdom:

• General consensus. Eleven analysts follow Blue Nile. Six of them call it a hold, and buy ratings outnumber sells 3-to-2.
• Revenues. Analysts have set the bar high for Blue Nile tomorrow. They're calling for a year-over-year improvement in quarterly revenues of better than 24%. $80.3 million is the target.
• Earnings. As if that bar weren't set high enough, the target for profits is higher still. Wall Street wants to see a 38% improvement to $0.33 per share. (That's a penny more than the top target Blue Nile set itself three months ago.)

Margin watch:
Now that we know what the "experts" are looking for, let's consider Blue Nile's ability to meet their expectations.

Foolish forensics:
The chart above shows that Blue Nile's gross margins have been on a steady, if shallow, decline for the past 18 months. Operational efficiencies have helped the company move its operating margin in the opposite direction, however -- up 20 basis points over the past six quarters. The trend in net margins looks a bit scary, but only until you realize why the net was so high in June and October. What you see there is the aftereffect of a $15.7 million tax credit the company took in December 2003 (since these are rolling, or trailing-12-month figures, a credit or charge taken in one quarter affects it, and the succeeding three quarters, as well.) Since the after-effects of that credit wore off and Blue Nile's net returned to its normal levels, the net has only gone up.

Foolish lookout:
Tomorrow, expect Blue Nile to do objectively well on its earnings -- the trend certainly suggests it will. If Blue Nile boosts its revenues but keeps its operating costs under control, its net margin could even increase. The only question is on Blue Nile's relative performance -- whether it can meet the ambitious goals that Wall Street has set it.

Blue Nile is one of the rare companies that qualifies as both a Hidden Gem and a Rule Breaker. The company's been recommended for subscribers to both newsletters. Want to dig up more small caps? Check out a free trial toMotley Fool Hidden Gems. More interested in growth, regardless of the company's size? TryMotley Fool Rule Breakerstoday for free.

Fool contributor Rich Smith does not own shares of any company named above.