Foolish Forecast: Resources Global Ain't Got the World on a String

Three months ago, I detailed the task laid at the feet of new Resources Global (Nasdaq: RECN  ) CFO Nate Franke: Keep sales growing as they have been, but stop the slide in margins. Five days on the job proved inadequate to solve the firm's problems last quarter. Tomorrow afternoon, we'll learn whether an additional three months of work have done the trick. Resources Global (RG) reports its fiscal Q3 2008 numbers on Wednesday.

What analysts say:

  • Buy, sell, or waffle? The 11 analysts following RG aren't optimistic, giving the stock just two buy ratings and nine holds.
  • Revenue. On average, they're looking for 9% sales growth to $204 million.
  • Earnings. However, profits are expected to drop 27% to $0.19 per share.

What management says:
Last quarter, I chided management for its failure to include a cash flow statement in its earnings release, forcing investors to guess at how much cash the business was generating. Two weeks later, the missing document finally showed up in the firm's 10-Q filing. Drumroll, please...

RG generated just $13.6 million in the first six months of fiscal 2008, a 31% drop in comparison to fiscal H1 2007, and much, much worse than the 4% decline in net profit.

What management does:
No surprises here. With revenue growth continuing to chug right along, this remains a margin story through and through. At all levels -- gross, operating, and net -- RG has experienced steadily declining profitability over the past year. Granted, even the present 11% operating margins are respectable, roughly midpoint between what Robert Half (NYSE: RHI  ) and what Motley Fool Inside Value pick Accenture (NYSE: ACN  ) generate. But the downward trend suggests that this could soon change.

Margins

8/06

11/06

2/07

5/07

8/07

11/07

Gross

39.4%

39.4%

39.3%

39.2%

38.8%

38.5%

Operating

13.8%

13.2%

12.6%

12.1%

11.6%

11%

Net

8.7%

8.2%

7.8%

7.4%

7.2%

6.8%

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:
So while I admit that the horse is quite dead at this point, allow me to give it one last kick: Franke's job is to stem the slide in margins.

He's got a fine client base to work with, with brand-name customers like Charles Schwab (Nasdaq: SCHW  ) , ConocoPhillips (NYSE: COP  ) , Southwest (NYSE: LUV  ) , and Tyco (NYSE: TYC  ) continuing to pour money into RG's revenue stream. But unless and until Franke finds a way to salvage the profits that his firm sieves from its revenue stream, profits will continue to suffer, and the stock will continue to slide.

What did we expect out of Resources Global last quarter, and what did we get? Find out in:


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