Looks like the analysts are calling this one right. Tomorrow after market-close, temp staffer Kforce (NASDAQ:KFRC) is due to report its Q4 and FY 2005 earnings numbers, and Wall Street is feeling bullish. On Friday, the U.S. Department of Labor reported that unemployment has reached its lowest level in five years. And no one's more likely to have benefited from the surge in employment than an employment firm.

Wall Street Wisdom:

  • General consensus. Only four analysts follow Kforce, but they're unanimous in calling the company a buy.
  • Revenues. Revenues for the fourth quarter of 2005 are believed to have increased 9% year over year to $207.8 million.
  • Earnings. Meanwhile, the analysts are predicting that reported profits will surge by 31% to $0.17 per share.

Margin watch:
How might Kforce take decent, but certainly not exceptional, revenue gains and transform them into a surge in profits three times as large? By squeezing more pennies out of each additional dollar. Kforce isn't letting its operational costs get out of hand as its revenues rise. As a result, its operating and net margins are expanding from "barely breakeven" toward "almost respectable."

Margins %

6/04

9/04

12/04

3/05

6/05

9/05

Gross

30.6

30.6

30.8

31.1

31.4

32

Op.

1.3

1.9

2.1

2.6

3.6

4.2

Net

1

1.7

3.8

3.7

4.2

4.2
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.

Last quarter, Kforce saw its profits surge an astounding 1,300% year over year. This quarter's expected rise of 31% would just be a continuation of that trend, albeit from a higher baseline.

Valuation metrics:
When you look at Kforce's valuation, though, investors don't seem to be rewarding the stock for its success. It suggests to me that investors don't believe this surge in U.S. employment will last. It's the only reasonable explanation why Kforce, with 20% projected earnings growth over the next five years, is still trading for just 15 times trailing earnings.

Competitors:
On the other hand, Kforce's higher-profile competitors do seem to be receiving higher valuations. In contrast to Adecco (NYSE:ADO), Spherion (NYSE:SFN), Kelly (NASDAQ:KELYA), and Robert Half (NYSE:RHI), could it be that Kforce is just the one undiscovered jewel of this bunch?

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