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Korn/Ferry Torpedoed

Profits rise, predictions disappoint, but the hull is sound.

It never fails.

No matter how well a company reports doing in a given fiscal quarter, if its numbers don't "beat estimates," or if its forward guidance doesn't align perfectly with analysts' pipe dreams, the stock takes a hit. And if, heaven forbid, a company both fails to beat the current quarter's estimates and predicts lower earnings than Wall Street wants to see -- look out below.

Case in point: Headhunter Korn/Ferry(NYSE: KFY)announced a 38% year-on-year increase in profits yesterday, notching $0.27 per diluted share for its fiscal first quarter of 2006. Unfortunately, that was precisely the number that a consensus of analyst estimates predicted, so the company got no boost from "making its numbers."

Worse, Korn/Ferry hedged its bets considerably when forecasting next quarter's numbers, naming a range of $0.22 to $0.27 per share. Analysts had already agreed amongst themselves that only $0.27 would be acceptable, and the risk that Korn/Ferry might have reason to be more cautious helped the stock drop by 7% yesterday.

Never mind that profits grew twice as fast as the 19% revenue growth in the first fiscal quarter. Or that operating margins increased 110 basis points year on year, to 15.3% (besting, by the way, the operating margin for full-year fiscal 2005 by 80 basis points, as well). Or that net margins grew 120 basis points year on year, to 9%.

Overall, the company issued disappointing guidance for next quarter and failed to beat the Street in this quarter. Apparently, that's all that counts on Wall Street.

Not so on Fool Street, however. We're encouraged not only by the past quarter's stellar results (echoed, by the way, at other employment firms, such as Kforce(Nasdaq: KFRC), which reported similarly strong earnings last month), but also by Korn/Ferry's feeling the need to increase its consulting headcount by 7% to keep pace with booming demand for its business.

Then add to that mix the fact that Korn/Ferry has finally begun to rein in the rampant stock dilution, for which we've roundly criticized the company in past quarters. In contrast to last year, when Korn/Ferry diluted its outside shareholders by 14.6%, Q1 saw only a 1.7% year-over-year rise in diluted shares outstanding.

Combine its recent success with a bright future, expanding margins, and an apparent commitment to let outside shareholders share more equally, and this looks like one stock that could really float investors' boats.

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