Seems you can't pick up a newspaper these days without reading a story about housing prices or sales dropping to yet another new multi-year low, or Ryland (NYSE:RYL), Lennar (NYSE:LEN), or Centex (NYSE:CTX) reporting yet another massive loss. Construction's in a funk, no doubt -- but there's construction ... and then there's construction.

Not everything's residential, you know. And subprime option ARM mortgages with no money down and a balloon payment due a week from Thursday have never really been commercial real estate's bag. So it is that the Motley Fool Hidden Gems-slash-Motley Fool Rule Breakers dual recommendation, LoopNet (NASDAQ:LOOP), has continued to thrive in the midst of the market downturn. Ever since it came public, and for two years running, this Match.com-for-the-commercial real estate-set has reported nothing but profits. Tomorrow, we learn if the streak still lives.

What analysts say:

  • Buy, sell, or waffle? Seven analysts run circles 'round LoopNet, giving it five buy ratings and a pair of holds.
  • Revenues. On average, they expect to see sales rise 28% to $21.8 million.
  • Earnings. Yet profits are expected to finally stumble and drop a penny to $0.12 per share.

What management says:
CEO Richard Boyle pronounced himself "pleased" with his company's performance back in April, citing "solid growth in our core marketplace," a 39% increase in registered members, and even a small increase in "premium" members -- despite the fact that LoopNet hiked its membership fees by 19%. (Read more about the quarter in fellow Fool Rick Munarriz's No Goofing Off at LoopNet.)

Looking forward to tomorrow's news, Boyle predicted sales and earnings in a range that brackets Wall Street's expectations. There's even a chance of an upside surprise, as Boyle suggested $0.13 per share might be doable.

What management does:
But hold on just one second. Remember how I said LoopNet upped its fees last quarter? Well, you wouldn't know it from the profit margins. Higher fees on a growing customer base should translate into improved margins.

I mean, sure, LoopNet is more profitable than archrival CoStar Group (NASDAQ:CSGP) -- and much, much more profitable than residential real estate specialists like HouseValues (NASDAQ:SOLD) and ZipRealty (NASDAQ:ZIPR). But while LoopNet's margins are already so high it's hard for them to improve much more, what we did not expect to see was a stagnant gross, and falling operating and net margins:

Margins

12/06

3/07

6/07

9/07

12/07

3/08

Gross

88.4%

88.5%

88.7%

88.8%

88.6%

88.6%

Operating

43.7%

43%

42.2%

42.3%

41.5%

39.7%

Net

32%

31.8%

31.7%

31.9%

29.9%

28.3%

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 what's standing between LoopNet and those expected boffo profits? In a word: "Investment."

Over the last two quarters, LoopNet has grown its average revenues a good 37%. Selling, general, and administrative expenses, in contrast, are up 51%, while R&D spending has leapt 46%.

Personally, I find this a little worrisome, but the team at Motley Fool Hidden Gems is unfazed. They believe investors should not worry overmuch if this year's earnings turn out to be flat, despite expected 20% revenue growth. But don't expect Mr. Market to like the idea. We could be in for another rough half year at LoopNet.

Related Foolishness:

See what else the analysts over at Hidden Gems and Rule Breakers are saying about Loopnet, with a free 30-day trial of either service.

Fool contributor Rich Smith owns shares of LoopNet. The Motley Fool has a disclosure policy.