It's been three-and-a-half years since blue-collar temp agency Labor Ready (NYSE:LRW) so much as just matched an earnings estimate -- let alone missed one. Will this week show us that the anemic housing market has put an end to that trend? We'll find out Wednesday afternoon, when the company reports its Q1 2007 numbers.

What analysts say:

  • Buy, sell, or waffle? Eleven analysts work the numbers on Labor Ready, giving it three buy ratings, a half-dozen holds, and a pair of sells.
  • Revenues. On average, analysts think sales slid 5% for the quarter, to $281.3 million.
  • Earnings. Profits are predicted to fall 24% to $0.16 per share.

What management says:
You already know this story. For three quarters running, homebuilders such as Ryland (NYSE:RYL), D.R. Horton (NYSE:DHI), Pulte (NYSE:PHM), and Centex (NYSE:CTX) have been reporting year-over-year declines in earnings. The exception among the big builders, Lennar (NYSE:LEN), has reported two quarters of declining earnings. So it was no surprise when CEO Steve Cooper painted a bleak picture for investors when reporting Labor Ready's Q4 performance back in January: "Several of our operating markets have experienced revenue declines from a slowing economic environment ... [T]he downward trends in new home construction experienced during the third and fourth quarters of 2006 have expanded to other industries and continued into the first quarter of 2007."

He did, however, wave a flashlight at the end of this dark tunnel, reassuring investors that despite expecting revenues to fall through the first half of this year, "we are as confident as ever that the fundamental demand for our services is sound, and we are just working through cyclical adjustments in the labor markets, particularly construction." And if this is just a cyclical thing, then this downward trend shall ultimately turn upward again.

What management does:
The bad news is that we haven't yet seen much bad news at Labor Ready -- which means it's still coming down the pike. At last report, Labor Ready was still experiencing growth in profitability in the form of rising gross, operating, and net margins. Get ready to see that trend reverse.

Margins

9/05

12/05

3/06

6/06

9/06

12/06

Gross

31.3%

31.7%

31.7%

31.9%

32.1%

32.1%

Operating

7.7%

7.9%

7.7%

7.7%

7.9%

8.2%

Net

4.8%

5.0%

5.0%

5.0%

5.2%

5.7%
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:
Philip Durell, lead analyst for the Motley Fool Inside Value newsletter, echoed Cooper's sentiments in his February update on Labor Ready. "We can expect lower net income for 2007 as Labor Ready weathers the downturn in the construction industry, but for the longer term, this company is in an excellent position to increase earnings and free cash flow."

Furthermore, on a per-share basis, Philip sees shareholders benefiting from management opportunistically buying up shares as the price lags the market. Last year, the company took 8% of its shares out of circulation. Thanks to a renewed repurchase program, Philip sees a further 9% vanishing in the future, which should concentrate those "increased earnings and free cash flow" in the hands of shareholders who hang tough through the coming downturn. With plenty of cash to fund the latest round of buybacks, no debt weighing on its mind, and the shares still trading within a few percent of the price where Philip recommended we buy the shares back in November, I think those extra buybacks look pretty certain to happen.

How good is Labor Ready? Why, it just might be The Best Small Cap for 2007: Labor Ready.

Labor Ready is an Inside Value recommendation. Discover more of the market's best bargains with a free 30-day trial subscription.

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