Macroeconomic Uncertainty Will Slow US Consulting Yet Enable Resilience

Key Takeaways

• Macro uncertainties and delayed client projects are dampening near-term growth, making revenue and earnings recovery less predictable despite strong long-term market trends.
  
• Investments in digital platforms and AI enhance operational leverage, but US market headwinds and sales execution challenges threaten sustained margin expansion and revenue resilience.
  
• Declining demand, rising competition, and internal performance challenges threaten long-term earnings stability, margin protection, and shareholder value if operational weaknesses are not addressed.

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.

• Although Resources Connection is poised to benefit from the ongoing global shift toward digital transformation and the rise in demand for flexible, on-demand professional services-both trends that should expand its total addressable market and support revenue growth-persistent macroeconomic uncertainties and lengthening client sales cycles are causing delayed project starts, reducing near-term revenue realization and potentially making growth less predictable over the next several quarters.
  
• While rising regulatory complexity and evolving compliance requirements across finance, ESG, and risk management should drive continued demand for expert advisory solutions and favor firms like Resources Connection, the company continues to face challenges from clients placing discretionary consulting projects on hold or abandoning deals, particularly in the U.S., which may suppress earnings growth if these pauses persist.
  
• Continued company investment in proprietary digital platforms, the integration of AI into internal processes, and a proven ability to improve bill rates-evidenced by higher average bill rates and sustained gross margins above 40%-are positioning the firm to enhance operational leverage and margin expansion over time; nevertheless, dependence on enterprise clients' willingness to increase spending and strategic delays in project awards could limit both margin and top-line improvement in the near term.
  
• Resources Connection's ability to expand and cross-sell among Fortune 1000 and large global clients underpins longer-term, higher-quality revenue streams and greater revenue resilience, but slow organic growth in key segments and project pipeline fluctuations are likely to constrain overall revenue stability, making future earnings recovery sensitive to macro and client-specific recovery timing.
  
• Although the company's diversified service model and greater international exposure-in particular, stable growth and high client retention in Europe and Asia Pacific-may help cushion regional volatility and boost consolidated revenues, structural headwinds in the U.S. consulting and on-demand markets, as well as operational disruptions from sales team turnover and longer ramp-up periods for new hires, create ongoing risk to sustained margin expansion and earnings reliability.

Resources Connection Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Resources Connection compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Resources Connection's revenue will grow by 3.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -34.8% today to 5.1% in 3 years time.
• The bearish analysts expect earnings to reach $31.5 million (and earnings per share of $0.97) by about August 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 price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 6.3x on those 2028 earnings, up from -0.8x today. This future PE is lower than the current PE for the US Professional Services industry at 25.4x.
• 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 7.27%, as per the Simply Wall St company report.

Resources Connection Future Earnings Per Share Growth

Risks

• Declining revenues in both the Consulting and On-Demand segments, particularly in the U.S., signal potential loss of market share or fading demand that, if not reversed, could result in sustained top-line contraction, directly lowering future revenues and earnings.
  
• The company recorded a substantial non-cash goodwill impairment charge of $69 million in its Consulting segment, reflecting weaker than expected business performance and reduced market capitalization; if this trend persists, shareholder equity and long-term return on invested capital may be pressured.
  
• Persistent macroeconomic uncertainties, elongated sales cycles, and delayed project starts-especially in large, complex deals-create unpredictability and heighten the risk of ongoing revenue volatility, making it harder to achieve stable earnings growth.
  
• The pipeline contraction and increased cases of abandoned deals, as well as heightened client caution resulting in more work being handled in-house or postponed, could translate into lower utilization rates and compress net margins if not offset by robust pipeline generation and conversion.
  
• Increasing competition from tech-driven or low-cost offshore firms, alongside evolving client preference for larger or highly specialized consultancies, may threaten Resources Connection's ability to protect pricing power and sustain gross margins, particularly if its pace of digital transformation lags behind industry peers.

Valuation

• The assumed bearish price target for Resources Connection is $5.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Resources Connection's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• 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 bearish analysts, you'd need to believe that by 2028, revenues will be $615.8 million, earnings will come to $31.5 million, and it would be trading on a PE ratio of 6.3x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $4.6, the bearish analyst price target of $5.0 is 8.0% 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.