Belated apologies to all investors in recruitment specialist Kforce (NASDAQ:KFRC) -- I'm afraid I must have jinxed the company with last quarter's Foolish Forecast, in which I observed that the firm hadn't "missed" a quarter since Q2 2004. Sure enough, Kforce proceeded to do just that in October. But on Tuesday, it has the chance to start yet another winning streak with its Q4 and full-year 2006 earnings report.

What analysts say:

  • Buy, sell, or waffle? Seven analysts follow Kforce, and buys outnumber holds 6 to 1.
  • Revenues. On average, the analysts think quarterly sales grew 21% to $246.1 million.
  • Earnings. Profits are believed to have done even better, up 29% to $0.22 per share.

What management says:
Kforce's October earnings release contained a wealth of information for the attentive reader. A few highlights: Macroeconomically speaking, CEO David Dunkel observed that the "environment for professional staffing remains positive, particularly in the skilled niches ... as college-educated unemployment remains near historic lows." Good news for the economy there.

On Kforce in particular, president William Sanders advised that the company is focusing on two things: selecting profitable clients who yield superior gross margins (the gross is up "520 basis points over the last two years"), and investing in its business in order to further grow revenues and earnings. Despite the cost of such investments, the firm believes it can keep its operating margins rising.

If you're wondering how much they might rise, then CFO Joe Liberatore has some advice for you: "We believe we are making excellent progress toward achieving our peak cycle target earnings before taxes of 10 percent of revenues." Which tells us two things: First, the firm's ideal operating margin (10%), and second, that management recognizes its business is cyclical -- and is perhaps approaching the top of the current cycle.

What management does:
You can see the gross margin improvement Sanders refers to in the chart below. Despite the cost of investing in the business, the bigger gross is permitting Kforce's operating and net margins to increase steadily as well.

Margins

6/05

9/05

12/05

3/06

6/06

9/06

Gross

31.4%

32.0%

32.4%

32.9%

33.5%

34.2%

Operating

3.6%

4.4%

5.0%

5.4%

5.8%

6.0%

Net

4.2%

4.2%

2.8%

3.0%

3.2%

3.4%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

One Fool says:
Now, about these "investments." Referring back to Kforce's last two quarterly reports, we can see them reflected in the firm's selling, general, and administrative costs, which have been averaging 23% higher than in the equivalent period from the previous year. Compared with the 16% rise in sales, it's clear that Kforce won't be able to keep its bottom-line margin expanding without a great deal of help on the top line.

During this period, cost of services has grown only 12%. So it's the spread between sales growth and growth in cost of sales that's providing the cushion that permits greater operating expenditures without crimping bottom-line results. And there, really, is your risk. If sales growth fails to materialize as expected, operating and net margins can be expected to contract dramatically.

Competitors:

  • Adecco
  • CDI Corp (NYSE:CDI)
  • Manpower
  • MPS Group (NYSE:MPS)
  • Robert Half (NYSE:RHI)
  • Spherion (NYSE:SFN)

We don't mean to force you, but if you're so inclined, feel free to peruse the following Foolish thoughts on Kforce and its peers:

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Fool contributor Rich Smith does not own shares of any company named above. The Fool's disclosure policy prefers Kforce to K-Fed.