Tic-tac-toe, investors want to know -- after "missing estimates" in both its second- and third-quarter reports this year, will Spartan Motors (Nasdaq: SPAR) make it three in a row for disappointment this week? The truck chassis specialist reports fiscal 2007 results Thursday morning.

What analysts say:

  • Buy, sell, or waffle? Half a dozen analysts ride herd on Spartan Motors, where buy ratings outnumber holds 5 to 1.
  • Revenue. On average, they're looking for quarterly sales to jump 76% to $218.1 million.
  • Earnings. But profits are only expected to rise 11% to $0.19 per share.

What management says:
There were two big news items out of Spartan Motors this quarter. First, the buyback. I detailed last month why I think Spartan should back away from its promise to repurchase 250,000 shares -- basically, the company didn't have the cash on hand, and doesn't appear capable of generating enough new cash to buy back the shares without taking on significant debt. Spartan proceeded to do the buyback, so on Thursday we'll look to see in what shape that left the balance sheet.

Second item: Not long after the buyback, Spartan endured a PR fiasco in the form of allegations that it had paid "kickbacks" to an employee of Force Protection (Nasdaq: FRPT) -- who was at the same time an independent contractor of Spartan -- for securing chassis-building contracts for Force's MRAP program. The controversy seems to have died down, and Spartan insists it continues to work as a subcontractor for Force Protection (and perhaps, by extension, Force's MRAP-building-partner General Dynamics (NYSE: GD)?). But at last report, prosecutors were continuing their investigation. Stay tuned.

What management does:
OK, we've got buybacks, we've got kickbacks -- but aside from all that, is Spartan doing any actual business? In fact, it is. But rolling gross margins on Spartan's wares have fallen for two straight quarters, pulling operating and net margins down with them. (Interestingly, that's the opposite of what we were seeing at rival Oshkosh (NYSE: OSK) just prior to its recent earnings report. And even after a drop-off in margins in the most recent quarter, Oshkosh still maintains its lead over Spartan.)

Margins

6/06

9/06

12/06

3/07

6/07

9/07

Gross

15.9%

16.1%

16.5%

16.8%

16.4%

15.3%

Operating

5.5%

5.7%

6.6%

7.0%

6.9%

6.1%

Net

3.5%

3.7%

3.8%

4.0%

4.0%

3.4%

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 where does all of the above leave us?

  • Spartan looks cheap at 14 times trailing earnings, versus 19% projected profits growth. But those profits are endangered by the twin headwinds of a housing crash (which could reduce tax revenues that municipalities use to buy its emergency vehicles), and an apparently imminent end to MRAP contracts.
  • Spartan's buying back its apparently cheap stock, but probably had to take on debt to do so -- and so far lacks the free cash flow needed to pay down debt.
  • And it faces litigation risk if prosecuted over the kickbacks scandal.

To this Fool, the risks seem to outweigh the benefits here. At a minimum, I'd want to see much-improved free cash flow in Thursday's report before buying into this story.

Fool contributor Rich Smith owns shares of Force Protection, which is a Rule Breakers selection. The Motley Fool has a disclosure policy.