Tic-tac-toe, investors want to know: After two straight quarters of blowing analyst estimates out of the oil patch, can seismic sleuth Dawson Geophysical (NASDAQ:DWSN) make it three in a row for earnings "beats" when it reports its fiscal-second-quarter 2007 numbers tomorrow morning?

What analysts say:

  • Buy, sell, or waffle? Three analysts follow Dawson, chanting in unison: "Hold until believed."
  • Revenues. On average, they're looking for 39% sales growth to $55.6 million.
  • Earnings. Profits are predicted to rise 18% to $0.67 per share.

What management says:
In last quarter's earnings conference call, CEO Stephen Jumper confided that "demand for our services remains robust, as we continue to maintain a record order book." While cautioning that "the majority of our contracts are cancelable on short notice," he observed that "recent setbacks in commodity prices have not affected demand for our services" and that "pricing will continue to remain strong." Looking forward, Jumper thought the firm had plenty of business to keep all 13 of Dawson's seismic survey teams at work "well into calendar 2007, with several crews booked into calendar 2008."

On the down side, business is so good that Dawson intends to continue spending freely to expand its capacity, adding a 14th crew and more than doubling capital expenditures to $35.1 million for fiscal 2007. Got to keep the big customers like Schlumberger (NYSE:SLB) happy, you know.

What management does:
Adding the 14th crew and spending to get it equipped seems likely to put a crimp in Dawson's margins. On the plus side, the firm's done so well for so long -- with rolling gross, operating, and net margins all rising strongly for four quarters straight -- that there's probably plenty of room to absorb a bit of compression.

Margins

9/05

12/05

3/06

6/06

9/06

12/06

Gross

22.5%

22.1%

24.0%

24.1%

25.5%

26.5%

Operating

11.6%

11.0%

12.7%

13.0%

14.7%

16.1%

Net

8.6%

8.2%

8.8%

8.8%

9.4%

10.2%

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:
Still, it's hard to complain about business being so good that it practically demands further investment to capitalize on the goodness. Rather than whine over the impending wave of capital expenditures, therefore, I'll point out a more serious risk to tomorrow's results. As fellow Fool Jim Gillies, who also monitored Dawson's conference call last quarter, observed in the post-earnings edition of Hidden Gems Weekly:

Fools should be aware that the weather concerns (normally associated with the fiscal first quarter) are seemingly hitting in the [second] quarter. CEO Stephen Jumper indicated January was a "tough weather month," and this challenging weather continued into February. While Dawson has down time built into its contracts, the coverage is never for full margins (rather, it's generally just fixed-cost coverage), so ... while this [Q1] was outstanding, [Q2's] results may be more muted.

Just a word to the Foolish. And for more Foolish words on Dawson and the rest of our market-thumping small-cap recommendations, don't forget to claim your free trial subscription to Motley Fool Hidden Gems.

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