Profitability Gains And Buy Rating Will Shape Digital Expansion Ahead

Key Takeaways

• Shift toward digital transformation and advisory services is boosting contract value, margins, and long-term profitability through higher-value client engagements.
  
• Expansion into international markets and adoption of tech-enabled models are increasing revenue diversification, operational efficiency, and resilience against market fluctuations.
  
• Persistent revenue declines, market headwinds, structural challenges, and lack of tech-driven efficiencies threaten the company's long-term growth prospects, profitability, and competitive positioning.

Catalysts

Engages in the provision of consulting services to business customers under the Resources Global Professionals (RGP) name in North America, the Asia Pacific, and Europe.

• Rising client demand for digital transformation, data modernization, and AI-related consulting-underscored by CFOs' growing focus on technology adoption and integrated data systems-positions Resources Connection to capture larger, higher-value contracts, supporting future topline revenue growth and margin expansion.
  
• The company's pivot from staffing-centric services to value-added, transformation-focused engagements (especially within CFO advisory, digital, and supply chain solutions) continues to increase average bill rates and gross margin, directly benefiting long-term profitability.
  
• Strategic expansion in key international markets, evidenced by strong growth and client retention in Europe and Asia Pacific, is increasing the company's addressable market and revenue diversification, reducing risk from U.S.-centric cyclicality and supporting ongoing earnings and margin stability.
  
• Increased demand for workforce flexibility and contingent talent models-as organizations embrace interim, project-based professionals-aligns with Resources Connection's core business, improving client engagement opportunities, recurring revenue potential, and utilization rates.
  
• Continued investment in technological integration, including AI-enabled talent platforms and offshore delivery centers, will enhance operational efficiency, scalability, and client value proposition, driving improvements in net margins and long-term earnings growth.

Resources Connection Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Resources Connection's revenue will grow by 3.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from -34.8% today to 4.5% in 3 years time.
• Analysts expect earnings to reach $27.8 million (and earnings per share of $0.85) by about September 2028, up from $-191.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.8x on those 2028 earnings, up from -0.9x today. This future PE is lower than the current PE for the US Professional Services industry at 26.3x.
• Analysts expect the number of shares outstanding to decline by 0.39% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.26%, as per the Simply Wall St company report.

Resources Connection Future Earnings Per Share Growth

Risks

• The company reported year-over-year revenue declines of 14% in Consulting and 16% in On-Demand (both primarily U.S. based), with Q1 guidance projecting a further 14% constant-currency organic revenue contraction, signaling long-term topline weakness in its core business lines if current macroeconomic uncertainties and project delays persist. (Revenue impact)
  
• A non-cash goodwill impairment charge of $69 million was recorded in the Consulting segment due to business performance and a reduction in market capitalization, reflecting potential structural challenges and diminished confidence in long-term earnings growth from this business. (Earnings/asset value impact)
  
• The ongoing shift by clients to utilize their own resources or stop project needs, as well as lengthening deal cycles and abandoned deals in the sales pipeline, increase the risk of persistent deal delays and shrinking client spend-especially in a slow U.S. consulting and staffing market-potentially undermining revenue stability and predictability. (Revenue/earnings impact)
  
• Rising competitive pressures from gig platforms, remote work marketplaces, and larger or more digitally integrated consultancies threaten Resource Connection's pricing power and market share, especially as certain services risk commoditization and clients source talent from lower-cost geographies. (Net margin/revenue impact)
  
• The firm's resource-heavy, less technology-leveraged delivery model could limit margin expansion, especially as automation and AI adoption accelerates industry-wide, increasing the risk that net margins and operational efficiency will lag larger, tech-enabled competitors, thereby constraining long-term profitability. (Net margin/earnings impact)

Valuation

• The analysts have a consensus price target of $9.0 for Resources Connection based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $15.0, and the most bearish reporting a price target of just $5.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $612.1 million, earnings will come to $27.8 million, and it would be trading on a PE ratio of 12.8x, assuming you use a discount rate of 7.3%.
• Given the current share price of $5.06, the analyst price target of $9.0 is 43.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.