Recruitment specialist Kforce (NASDAQ:KFRC) has developed a pretty good history of matching or beating earnings estimates in recent years. It hasn't "missed" a quarter since Q2 2004. Can the company keep up the good work? Tune in tomorrow after the market closes to find out.

What analysts say:

  • Buy, sell, or waffle? Six analysts follow Kforce, and buys outnumber holds five to one.
  • Revenues. On average, analysts think sales grew 15% since last year, to $239.2 million.
  • Earnings. They're looking for 29% profits growth to $0.22 per share.

What management says:
The second-most important announcement at Kforce this quarter was also the most lyrical. The firm's primary government recruiting division, Kforce Government Holdings (KGH), hired a new CEO named Patrick Moneymaker. Sounds propitious. And what will Mr. (actually, retired Rear Admiral) Moneymaker be "chief executing?" Among other things, a new wholly owned subsidiary of KGH, Bradson Corp., which has more than two decades of experience providing accounting and finance services to the U.S. government. Earlier this month, Kforce announced that it's paying $73 million to acquire Bradson and its $26.6 million in trailing (and $30.6 million in anticipated 2006) revenues.

What management does:
So before adding Bradson to the mix, how was Kforce doing on its own? Not half bad, as it turns out. Although the table below shows a pretty steep drop-off in net profitability at the end of last year, that came about through a quirk of the trailing-12-month results. In December 2004, you see, Kforce recorded a $12.6 million tax benefit that inflated its rolling net results in that and the three succeeding quarters. In the December 2005 quarter, therefore, the effects of the tax benefit disappeared from the rolling results. Remove that tax benefit from the picture, and Kforce's rolling gross, operating, and net margins have all been trending upward for the past 18 months.

Margins %

3/05

6/05

9/05

12/05

3/06

6/06

Gross

31.1

31.4

32.0

32.4

32.9

33.5

Op.

2.6

3.6

4.2

5.0

5.4

5.8

Net

3.7

4.2

4.2

2.8

3.0

3.2
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:
Returning to Bradson, let's take a quick look at the valuation on this acquisition. So far this year, Bradson has already generated earnings before interest, taxes, depreciation, and amortization (EBITDA) of $5.2 million, and anticipates closing this year with EBITDA of $11.1 million. And as we've already discussed, the firm booked $26.6 million in trailing revenues, and anticipates $30.6 million for 2006. Thus, Kforce paid 2.7 times trailing sales (2.4 times forward sales) and about 6.6 times forward EBITDA to acquire Bradson.

In contrast, Kforce itself trades for just 0.7 times trailing sales, and 9.8 times trailing EBITDA. So why is this such a good deal for Kforce? Look at the relationship between the two valuations. Bradson looks a lot more expensive than Kforce as a multiple to sales, but a lot cheaper as a multiple to EBITDA, because Bradson's revenues are much (about five times) more profitable than Kforce's. Kforce found itself a profitable target, and is paying up to own it. In future quarters, look for Kforce's own margins to expand in consequence.

Competitors:

  • Adecco (NYSE:ADO)
  • CDI (NYSE:CDI)
  • Manpower (NYSE:MAN)
  • 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.