The next few quarters are looking up for this company from a profitability standpoint as well, due to the company's ability to match revenues with costs. As a consulting company, the vast majority of RCM's costs are in the form of wages. When billable hours (revenues) drop as they do in downturns, RCM can reduce its labour costs accordingly. As such, while competition and reduced demand could disrupt profitability from quarter to quarter or year to year, the risk that this company could lose money for extended periods of time is quite low.
But there still remains a major red flag with this company: how it handles its profits. In the last 8 years (since the last recession), the company has earned about $50 million in after-tax income from its consulting work. Unfortunately, it has squandered every penny of that money on acquisitions that have ill-performed: Goodwill writedowns amount to over $50 million over that same period.
While most of that Goodwill was written down last year as the recession took hold, it doesn't appear as though management has learnt its lesson. Despite winning a lawsuit for $9 million (or almost one third of its market cap) several months ago, RCM has not announced any plans to distribute that money. In fact, it has continued to acquire companies, as a subsequent event to the second quarter report shows it has already spent some of that cash and issued more shares for the purpose of acquiring another company.
Furthermore, its annual report offers little hope for a change in policy:
The Company has never declared or paid a cash dividend on the Common Stock and does not anticipate paying any cash dividends in the foreseeable future. It is the current policy of the Company’s Board of Directors to retain all earnings to finance the development and expansion of the Company’s business.
Despite the fact that RCM is likely an undervalued company, shareholders may never see a dime. While the company might manage to grow its earnings through acquisition, it's entirely possible that it will squander its earnings in attempting to do so. As such, the risk is there that this promising value stock will never provide value to its shareholders.
Similarly, we recently looked at another company with "unusual" expenses over the years which significantly impacted its valuation.