Another day, another fiscal year for one of our Motley Fool Stock Advisor companies. The day: Wednesday. The company: Resources Global (NASDAQ:RECN), which will be reporting its fiscal Q1 2007 numbers.

What analysts say:

  • Buy, sell or waffle? Nothing's changed here since last quarter -- 10 analysts still follow Resources Global, splitting their ratings down the middle: Half say hold; half say buy.
  • Revenues. On average, they're looking for 10% sales growth to $165 million.
  • Earnings. But a 14% decline in profits to $0.25 per share.

What management says:
Resources Global didn't overly impress investors with its fiscal 2006 performance, reported back in July (read Stephen Simpson's write-up on the year that was). As the firm continued its global expansion by opening 13 new offices, operating costs ate significantly into profits. As a result, although business boomed "even in the face of lower demand for regulatory compliance services," profits lagged the firm's impressive 18% sales growth, increasing just over 5%.

CEO Donald Murray gave little assurance that this trend will change in the immediate future, warning that adding the new offices adds "general and administrative expenses" that "impacts our profit until those offices achieve breakeven status." He did not say when the firm expects those offices to reach the breakeven point.

What management does:
As you can see in the table below, the numbers support Murray's view. The cost of providing services has stayed pretty even with revenues, with the result that gross margins are holding fairly steady. On a rolling basis, they've given up only 30 basis points in the last 18 months. However, operating costs (which include the general and administrative expenses he mentioned) have fallen more significantly, down 220 basis points in the last year and a half.

Margins %

2/05

5/05

8/05

11/05

2/06

5/06

Gross

39.6

39.6

39.6

39.5

39.3

39.3

Op.

17.2

17.2

17.0

16.3

15.5

15.0

Net

10.3

10.4

10.4

10.1

9.8

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:
Mr. Market remains decidedly pessimistic on Resources Global's future in a post-SOX-advent world, and the stock remains a two-time loser for us at Stock Advisor, with both recommendations still in the red. That said, co-lead Stock Advisor analyst Tom Gardner is taking a contrarian view of things, and continues to like the company. Citing its diversified customer base and high renewal rates by existing customers (plus, let's not forget, that 19% rise in sales that suggests new customers value the company's service as well), he's keeping the firm on his "First Team" of Stock Advisor recommendations worth buying at today's prices.

The bad news? Unless and until Resources Global proves it can grow its profits at a rate at least matching its strong sales growth, we'll probably be able to continue buying at "today's prices" for some time to come. For this stock to move higher, we need to see its considerable investments in growing the business begin paying off in the form of higher profits.

Competitors

Customers

Adecco (NYSE:ADO)

ConocoPhillips (NYSE:COP)

Robert Half International (NYSE:RHI)

Cummins (NYSE:CMI)

Southwest (NYSE:LUV)

Tyco (NYSE:TYC)



Not sure whether you should invest in Resources Global? Get the CEO's own views on its future in our recent interview with Donald Murray.

Tyco is an Inside Value pick. Resources Global isn't the only stock on David and Tom Gardner's watch list -- see which others make the cut by taking a30-day free trialofStock Advisor.

Fool contributor Rich Smith does not own shares of any company named above. The Fool has a spiffy disclosure policy.