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RCM Technologies (RCMT) is a micro-cap company (market capitalization below $100 million) that provides IT consulting, engineering and staffing services. It also provides specialized health care services. Some of RCM's clients include IBM, Lucent, Pfizer, Merck and NASA.

I find the company interesting for a variety of reasons: The employment numbers have been very good in the recent months and most of the large-cap staffing and consulting firms such as Robert Half (RHI) and MPS Group (MPS) have seen their stock prices appreciate more than 50% over the last year. RCM Technologies is in exactly the same market sector as these bigger companies but remains relatively undiscovered.

RCM Tech recently announced full year 2005 results and while revenue came in only marginally higher than the previous year at $180.6 million, earnings rose 59% to $3.5 million from $2.2 million in the year ago period. While these earnings are not spectacular, a comment by the Chairman and CEO stating that recently awarded contracts will have a positive impact on the results for the first quarter of 2006 and in the subsequent quarters shows that the company can be expected to continue performing well in 2006.

The consulting and staffing sector is highly fragmented and it is good to see that RCM Technologies is attempting to grow through acquisitions as evidenced by its fourth quarter acquisition of Soltre Technology.

RCM Technologies has a very strong balance sheet with $64.12 million in current assets and just $31.08 million in current liabilities. For a company with a market cap of $76.09 million and a current price of $6.48 per share, it would mean that an investor would essentially be picking up this cash flow positive company for about $3.67 a share.

Insiders still hold 24% of the company and there have been no reported insider sales over the last few months. I feel that there is a lot of upward potential for RCM Technologies over the next 12 months.

Competitors:

RCM Technologies faces competition from a plethora of small and large companies that provide IT consulting and staffing services. As mentioned above Robert Half (RHI), MPS Group (MPS) and Manpower Inc (MAN) are the 800-pound gorillas in this sector. Some of the smaller competitors include Volt Information Sciences (VOL) and iGATE (IGTE).

The Good:

• Profitable company sporting attractive valuation with a forward P/E of 11.57 and current Price/Sales of 0.40.
• Recently awarded contracts including an engineering contract to help restart two nuclear-generating units will be very positive for the company in 2006.
• A strong balance sheet with $64.12 million in current assets, $31.08 million in current liabilities and no long-term debt.
• Relatively undiscovered company with large insider ownership.

The Bad:

• While earnings increased 59% for 2005, revenue growth was anemic and came in at 6.67%.
• Low operating and profit margins thanks to a highly competitive environment.

The Numbers:

P/S 0.40
P/E 21.53
Cash $12.33 Million

RCMT 1-yr Chart

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Source: Lots Of Upward Potential For RCM Technologies (RCMT)