RCM Technologies: Yet To Prove Growth Is Sustainable (RCMT)

The last quarter RCM Technologies, Inc. (NASDAQ:RCMT) reported on was a decent one, with GAAP EPS of $0.33 beating by $0.05, although revenue of $58.2 million missed by $3.71 million.

Management stated there are enormous opportunities in the segments it competes in, but being able to sustainably meet that demand is still questionable based upon the tightness in the labor market that has held back a lot of potential growth the company has before it.

In the near term it continues to focus on integrating its latest acquisition TalentHerder into the business, while it opened its Innovation Center of Thermokinetics, which while holding promise, has yet to confirm one way or the other what it’ll contribute to the top and bottom lines of the company.

With RCMT stock price pulling back significantly from its 52-week high of $28.82 on June 6, 2022, and now trading under $14.00 per share as I write, it appears the market is also holding back on bidding up the share price, as it’s probably waiting to see how the company executes on its various opportunities before it.

In this article, we’ll look at some of the numbers from its recent earnings report, the opportunities before it, and why there’s no guarantee it’ll be able to take full advantage of them.

Some of the numbers

Revenue in the third quarter of 2022 was $58.2 million, compared to revenue of $45.5 million in the third quarter of 2021. Revenue for the first three quarters of 2022 was $214.5 million, compared to revenue of $139.00 million in the first three quarters of 2021.

Gross profit in the third quarter of 2022 was $17.4 million, compared to a gross profit of $12.2 million in the third quarter of 2021. Gross profit for the first three quarters of 2022 was $62.5 million, compared to a gross profit of $35.3 million in the first three quarters of 2021.

Net income in the third quarter of 2022 was $3.5 million, or $0.35 per diluted share, compared to net income of $2.8 million, or $0.24 diluted in the third quarter of 2021. Net income for the first three quarters of 2022 was $16.1 million, or $1.58 per diluted share, compared to net income of $5.02 million, or $0.45 per diluted share in the first three quarters of 2021.

Cash and cash equivalents at the end of the reporting period were $761,000, compared to cash and cash equivalents of $235,000 at the end of calendar 2021.

The most important takeaway from the earnings report to me is the growth trajectory the company showed, but also whether or not it’s going to be able to continue on at that pace in the quarters ahead. Based upon its pullback since June 6, 2022, the market seems to think the stock got ahead of itself.

Management also stated that while demand is very high in the segments it competes in, it’s getting hard to supply it in some of the segments, especially in healthcare.

Also, if considering taking a position in the company, take into account it’s extremely thinly traded, which could make it hard to exit a position if the trade turns against you.

Potential opportunities before it

TalentHerder

In the near term, the primary focus will continue to be on integrating its recent acquisition of TalentHerder into the company. RCMT believes the inclusion of TalentHerder in its worker acquisition base will expand its candidate reach beyond its current capabilities.

Management also sees TalentHerder making it more competitive in regard to rates because of it bringing more scale in remote and in-person working environments.

In the early stages of integration, the company said it has already found some potential new opportunities from the joint marketing efforts of its newly blended sales team.

Innovation Center of Thermokinetics

The company announced the grand opening of its Innovation Center of Thermokinetics in the third quarter of 2022, which the company believes will empower its engineers to develop new processes as it works with its customers.

What it’ll do, in many cases, is allow for the running of small-scale versions of the system which will provide the necessary empirical data to successfully implement the process on a larger scale.

With its competency in some emerging technologies, which includes sustainable aviation fuels (SAF), it sees the facility as having a meaningful part to play in emerging process technologies in the years ahead.

In SAF alone, estimates are it’ll represent spend in a range of $40 billion to $50 billion through 2025. And when taking into account expenditures through 2040, estimates are they’ll come in at another $1 trillion by then.

Management believes there will be strong demand for companies or institutions that need to find ways to scale in a cost-effective way.

RCM Healthcare

RCMT sees its Healthcare unit having a lot of opportunity before it based upon the impact of COVID-19 on health professionals in the U.S. market, where, according to a survey from Mackenzie cited by management on its last earnings call, 29 percent of RNs in the country are seriously considering leaving direct patient care, with many of them saying they’re thinking about getting out of the workforce altogether.

By 2025, according to management, there could be a shortage of from 200,000 to 450,000 nurses in the U.S. market. Supply isn’t able to meet demand, and the company sees this as its biggest impediment in taking advantage of the potential growth opportunity it has in that market.

In some areas the company has been making inroads, noting that it has added a large number of school clients in 2022, and has also added some new school clients as well, with demand being so strong.

At the same time, with COVID being officially transitioned from being categorized as a pandemic to now being an endemic, it is expected to be a headwind for the company in the fourth quarter of 2022. It could also be a headwind if it is continually downgraded in its severity.

Management does believe it has a competitive advantage in the core education end market, which is why it believes it’ll be able to provide solutions to its customers over the next couple of years in the healthcare market.

As for the practical’s concerning the company’s optimism, its initial strategy will be to leverage its technology, using an “analytical, data-driven approach” in order to bring connectivity between various resources and the demand that exists. Assuming the company has the right strategy in place and is able to execute it, it feels it has a lot of potential upsides it can unlock in the healthcare sector. If it’s successful, the company could have a more defensible moat going forward.

Conclusion

There are three things I think are the most important to watch with RCMT in the quarters ahead, and they are its Healthcare segment, the integration of TalentHerder and the impact on the top and bottom lines of the company, and how much its Innovation Center of Thermokinetics contributes to the performance of the company.

All three of them represent potential, but it’ll time some time before we see if the company is able to execute on its strategy concerning them. I think Healthcare has the potential to be the one that disappoints the most because of the strong possibility the nursing market in particular may not recover to past levels of labor participation. If that’s how it works out, that will take a significant slice out of the company’s expectations for its performance.

Based upon the performance of the stock over the last year, as far as its share price movement goes, it appears the market is pricing in my thesis that it has yet to prove it can execute on its strategy, and so appears to be in a wait-and-see mode at this time.

Last, investors have to be careful with low-volume stocks like RCMT, because shareholders that are in at a low cost basis for a prolonged period of time, can do things to move the share price up and down in alignment with their long-term holding strategy. In other words, they can take a small number of shares and bid them higher and lower, causing unaware shareholders to panic and sell, or buy and chase, in order to improve their positions. I’ve owned some low-volume stocks like RCMT before, and have watched it happen, or been on the receiving end of that strategy.

Bringing it altogether, I think the company needs to prove it can execute on its strategy before taking a position in the company. As management stated, its fourth quarter 2022 results may be lower because of a weaker performance from Healthcare, and if that continues on in 2023, it could be a tough year for the company.

As for the other potential positive catalysts, it’s too early to tell what level they’ll contribute to the performance of the company. For these reasons, I think that there is more risk than reward in light of the visibility we have with the company as it stands now.