Why Resources Connection Stock Just Dropped 12%

What happened

Shares of consulting firm Resources Connection (NASDAQ: RECN) are down 12.2% as of 12:30 p.m. EDT after the company reported fourth-quarter 2018 earnings this morning — and that's the good news. The bad news is that earlier today this stock was down as much as 23%!

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And yet, Resources Connection didn't report a loss for the quarter, but a 0.12-per-share profit, and says it would have earned even more — $0.27 — if not for a series of one-time charges that depressed results.

So what

So how is that bad news? Well for one thing, Wall Street analysts had apparently told investors to expect pro forma earnings of $0.28, meaning that Resources Connection "missed by a penny" last quarter. Hurting the earnings result was an 80-basis-point decline in gross margin to 38.3%, and a very high income tax rate of 55%.

Granted, Resources Connection did report very strong revenue in the quarter — $183.8 million, or about 24% more than it recorded in Q4 2017. But it failed to reap any improvement in profits whatsoever from the sales growth. In fact, earnings per share (the real one — not the pro forma number) declined 20% year over year. As a result, full-year earnings growth was cut to a mere 7% — $0.60 per share — below the company's 12% rate of full-year sales growth.

Now what


All of this explains why Resources Connection dropped so much early on — but why were its losses later pared? Well for one thing, fiscal 2019 is looking like it could be a lot better than fiscal 2018 was. According to data from Yahoo! Finance, analysts think Resources Connection could grow its earnings as much as 63% off of 2018's depressed number to $0.98 per share, even if sales grow only 8% to $706 million.

At a forward earnings multiple not much bigger than 15 times, that gives investors hope that Resources Connection stock, down so much today, could soon bounce back.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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