Some people say that good help is hard to find -- but one company aims to fix that. Resources Connection (NASDAQ:RECN), a recommendation of Motley Fool Stock Advisor, provides professional human resources to companies requiring accounting, legal, and technical expertise. Last week, we published an interview with company CEO Donald Murray (read it here). Today, we preview tomorrow's report on fiscal Q3 2006 earnings.

Wall Street Wisdom:

  • General consensus. Ten analysts follow Resources today, one more than three months ago. Overall, the mood is bullish, with six buy ratings, three holds, and one sell.
  • Revenues. Consensus expectations call for 17% year-over-year earnings growth, with the average target hovering around $158.6 million for fiscal Q3.
  • Earnings. Profits are only expected to climb 12%, however, to $0.29 per share.

Margin watch:
The knock on Resources these days is that its success was due to companies being forced to pay up to comply with Sarbanes-Oxley (SOX). Now that those revenues are drying up fast, so is Resources' stock price. According to the numbers below, that hypothesis doesn't seem very accurate. SOX revenues may be on the wane, but if so, they're being replaced by new business in related services. As a result, gross margins have held pretty much steady over the past 18 months. Rolling operating and net margins are both up significantly.

Margins %

8/04

11/04

2/05

5/05

8/05

11/05

Gross

39.2

39.6

39.6

39.6

39.6

39.5

Op.

14.1

16.3

17.2

17.2

17

16.3

Net

8.5

9.8

10.3

10.4

10.4

10.1
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.

Foolish lookout:
In his December 2005 semiannual portfolio review, Stock Advisor co-analyst Tom Gardner urged our members to focus less on contract renewals in future quarters, and more on the average size of contracts. That's one number we'll focus on tomorrow.

We'll also want to check in on free cash flow, for two reasons. First, as I pointed out back in December, Resources did not include a cash flow statement with its last earnings release. Including these statements would definitely be shareholder-friendly. Second, last quarter saw a significant decline in free cash flow year over year. In the first six months of fiscal 2006, increased capital expenditures drained free cash flow to $11.6 million -- less than half what the company generated in the first half of fiscal 2005. That's a trend we'd like to see reversed.

Competitors:
CEO Donald Murray told us last week that his firm has very few "direct" competitors. But it does compete "broadly" with Adecco (NYSE:ADO) and Robert Half International (NYSE:RHI).

For more stock picks with the resourcefulness to beat the market, sign up for a free 30-day guest pass to David and Tom Gardner's Motley Fool Stock Advisor .

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