Motley Fool Hidden Gems recommendation CNS (NASDAQ:CNXS) took investors for a wild ride in 2005, shooting up to more than $31 a share before falling back to $24 and change. Take a deep breath, Fools, and get ready for another price move. Tomorrow's news (registration required) should reveal just which way the stock is headed.

Wall Street Wisdom:

  • General consensus. Despite its amazing performance since being recommended in Hidden Gems two years ago, only four analysts follow the stock today. Of these, one rates it a "buy" and three just say "hold."
  • Revenues. Consensus estimates agree that CNS grew its revenues by about 8% in its fiscal Q3 2006.
  • Earnings. Regardless, the analysts don't think profits grew at all. In fact, they expect CNS to post $0.02 fewer profits than it did a year ago, for a total of $0.28.

Margin watch:
For my part, I think the analysts are wrong on profits -- just as they've been wrong in each of the past four quarters, undershooting the company's mark by an average of 60%. Consider its margin trends:

Marg.

6/04

9/04

12/04

3/05

6/05

9/05

Gross

67.5%

68.2%

71.8%

71.5%

71.9%

71.7%

Op.

11.4%

9.9%

16.2%

21.4%

23.4%

23.5%

Net

8.6%

7.8%

11.3%

14.6%

16%

16%
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.

Gross, operating, and net margins all seem to be settling in at a new range, no longer increasing precipitously. But compared to last year, the new range lets CNS squeeze twice as much profit from every dollar of revenue. I'll be very surprised if the company doesn't beat last year's numbers in tomorrow's report.

Valuation metrics:
Here's the rub. The analysts believe that CNS will grow at an annualized rate of 18% in the long term. That's tremendous, but perhaps not enough to justify its P/E ratio of 21, or its price-to-free cash flow ratio of 21. On the other hand, if CNS beats analyst estimates yet again tomorrow, it just might suggest that analysts' growth projections are too low. In that case, the stock could be a bargain.

Competitors:
CNS is a small fish in a very big pond. Its competitors -- each many times its size -- include ResMed (NYSE:RMD), Respironics (NASDAQ:RESP), and Schering-Plough (NYSE:SGP).

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