Foolish Forecast: Korn/Ferry Debarks

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Headhunter Korn/Ferry (NYSE: KFY) reports its fiscal Q4 and full-year 2006 earnings results tomorrow. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.

What analysts say:

• Buy, sell, or waffle? Eight analysts follow Korn/Ferry, with five rating it a buy and three a hold.
• Revenues. On average, they're looking for 8% sales growth tomorrow, to $141.3 million.
• Earnings. Also expected is a 7% rise in profits to $0.29 per share.

What management says:
Commenting on the company's performance in fiscal Q3 back in March, CEO Paul Reilly cited "strong demand for all of our service offerings across all geographic regions." This Fool suspects we'll hear much the same thing tomorrow, considering that earlier this month, the Institute for Supply Management reported "the 22nd consecutive monthly increase in non-manufacturing employment" in the U.S., with industries reporting increases in employment outnumbering those reporting flat or decreasing employment by nearly two to one.

What management does:
The strong job market has been very kind to Korn/Ferry and its peer headhunters/employment firms in recent quarters. In Korn/Ferry's case, operating and net margins continue to climb.

Margins %	10/04	1/05	4/05	7/05	10/05	1/06
Op.	11.9	13.4	13.8	14.1	14.1	14
Net	7.2	7.9	8.1	8.4	8.5	9.6

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
The question in this Fool's mind is, therefore, why aren't profits expected to grow faster than sales tomorrow? With sales rising and margins expanding, that's precisely what you'd expect to see happen -- more pennies per dollar dropping to the bottom line, and more dollars from which those pennies are squeezed, should result in faster-growing profits.

Reviewing the firm's recent income statements, though, I think the answer lies in the fact that twice in the past year, Korn/Ferry has had its net profits boosted by one-time gains from sales of investments. If such gains do not recur in tomorrow's results, then we may start to see the firm's rolling net profit margins begin to return to the levels they were at a year or so ago. Another risk is in operating costs, which would hit both the operating and net margin lines. Over the past six months, operating cost increases outpaced sales gains 14% to 13%. If this trend continues, then the sales gains that analysts predict for tomorrow could indeed yield smaller gains in profitability, as the operating costs suck up some of those extra pennies before they hit the bottom line.

Competitors:

• Adecco (NYSE: ADO)
• Heidrick & Struggles (Nasdaq: HSII)
• Kforce (Nasdaq: KFRC)
• Monster (Nasdaq: MNST)
• Reynolds & Reynolds (Nasdaq: REY)
• Robert Half (NYSE: RHI)

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