RGP - Resources Connection: Project Pipeline Needs To Start Delivering (Technical Analysis)

2023-03-12 23:36:49 ET

Summary

• Company announces sales and earnings beats in Q2.
• Upcoming comparables, however, are well down on fiscal 2022.
• Clients have been stalling projects, and the market is taking notice.

Intro

We wrote about Resources Connection , Inc. ( RGP ) in March of last year when we ran through the trends of the key metrics which make up RGP's dividend. Although the level of cash-flow generation was not hectic at the time, we were impressed with RGP's growing book value and profitability metrics in general. Shares now find themselves up approximately 8% since we penned that piece 12 months ago, which equates to a total return of almost 11% when one factors in the dividend payments. All in all, this is a solid result given the S&P has lost over 9% of its value over the same time period. Our job now is to decipher whether RGP can continue to gain against the major indexes and continue to act as a solid hedge in an elevated volatility environment.

When we go to the technical chart, we see that shares (in terms of near-term direction) have not been able to punch back above their 200-day moving average which they lost at the beginning of calendar 2023. In fact, when we couple this with the combination of the stock's pattern of lower highs since last August and the recent MACD crossover, investors need to be prepared for more volatility in RGP over the near term. This could easily see shares stooping back down to test the $15 to $16 level once more.

When we pull up a long-term chart of RGP, we see that shares last year tested their 2007 highs but failed to punch through this long-term resistance level. Furthermore, the recent crossover of the long-term MACD indicator leads us to believe that shares must bottom here pretty quickly before a sustained trend to the downside gains any significant traction.

Q2 Earnings

Bulls may find the above trends in the technicals surprising especially given the company's recent second-quarter earnings beat (EPS of $0.51). Furthermore, we witnessed gross margin expansion in Q2 along with an ever-improving SG&A trend which continues to boost profitability at the company.

However, when we are dealing with a company trying to take out its all-time highs, growth rates always come in for extra scrutiny, and with good reason. For a start, although we have seen year-over-year growth regarding RGP's earnings for the past six quarters now, the upcoming quarterly comparables (Both in sales & earnings) are poor, to say the least. The expected $0.19 per share EPS estimate for Q3 (Which has been cut by 40% over the past 30 days alone) if met would be a 67% reduction over the same period of 12 months prior. Moreover, the Q4 estimate of $0.43 per share if met would be a 30%+ cut compared to the Q4 of fiscal 2022 as we see below.

The CEO on the recent earnings call went into fundamental reasons why top-level consulting services will continue to grow in demand. Management believes the shift towards project teams made up of more external members in large companies as well as the value that can be added from a digital standpoint all point to growth for RGP in the long run.

Market Uncertainty

However macroeconomic uncertainty which is resulting in clients not pulling the trigger on projects is weighing on RGP's financials irrespective of the broad pipeline of projects the company has at its disposal. This really gets to the crux of the matter as the market wants to know how fast RGP's pipeline will indeed get filled. Furthermore, the jury remains out on whether short-term headwinds such as seasonal weakness and US dollar strength will end up abating in due time as management is suggesting. Suffice it to say, the market needs to see some of RGP's potential regarding the backlog being realized here to entertain the possibility of the technical bearish trend alluded to earlier reversing to the upside.

Conclusion

Therefore, to sum up, although RGP has sound profitability and an excellent balance sheet, the market is looking for more growth in order to price shares higher here. Furthermore, although shares are currently trading for 10.65 times GAAP 2023 earnings, RGP's 2023 sales multiple of 0.75 is slightly above average for this company so undervaluation may not be as clear cut as some may believe. Let's see what Q3 earnings bring. We look forward to continued coverage.

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