Richardson Electronics Stock: Searching for Bottom (NASDAQ:RELL)

Richardson Electronics Ltd.NASDAQ:RELL) The stock fell nearly -20% on the report after its most recent quarterly results fell short of market expectations. The company, recognized as a global leader in specialty power circuit components, microwave technology and imaging solutions, is citing “difficult economic conditions.” It is a broader process of revamping the product portfolio.

It’s not all terrible. Management remains optimistic that things will improve going forward, citing increased backlog and new growth initiatives. Notably, Richardson’s balance sheet has zero debt, which we believe supports the stock’s current dividend for the foreseeable future.

On the other hand, it is difficult to have any degree of confidence in the stock given the circumstances and the significant uncertainty that remains. Ultimately, we expect volatility to continue over the next few quarters until we have operational and operational evidence. Financial turnaround.

RELL Revenue Summary

RELL reported second-quarter fiscal 2024 EPS of -$0.13, a surprise loss compared to consensus estimates for a profit of $0.01. Revenue of $44.1 million was down -33% year over year and well below expectations of $52 million.

The company pointed to the timing of certain large orders and particular weakness among Chinese customers to explain the poor performance. Gross margin was 28.4% due to lower sales. This represents an adjusted operating loss in the current quarter, up from 33.2% in the second quarter of fiscal 2023.

By sector, sales were generally weak. Core Power & Microwave Technologies (PMT) Group announced a -23% decline in revenue due to a slowdown in orders from semiconductor wafer manufacturing customers.

Even more worrying is the -79% decline in sales in the Green Energy Solutions (GES) segment. In this case, in the comparative period last year, large-scale orders related to ultracapacitor modules for wind turbines were received early among large-scale projects during that period.

The ‘Canvys’ division, which manufactures specialty displays and monitors, also saw significant declines during the product design cycle.

Management’s comments reaffirmed its long-term confidence in the business. Despite the messy results, the company’s overall backlog increased 2%, with more than $150 million in its business pipeline.

In this respect, the GES Group, which deals not only with wind energy solutions but also energy storage and battery technologies, is still considered an important growth driver in the future.

Although it doesn’t provide formal financial guidance, management expects “significant reservations” over the next few quarters, which would mean its fiscal 2025 results will improve. From the earnings conference call:

Our customers repeatedly tell us that we have maintained market share for core GES applications and identified new product opportunities. And the revenue decline we’re experiencing is purely a timing issue. In fact, our customer pipeline and number of opportunities continue to grow as we seek to capitalize on important energy transition projects around the world.

We mentioned the strong balance sheet. Richardsons ended the quarter with $23 million in cash and no debt. This compares to the current dividend, which represents an annual payout of $3.4 million, keeping in mind that operating cash flow was positive last quarter. If the financial situation improves, it is judged that there is room to maintain dividends until this year.

What’s next for RELL?

The main takeaway we can take from looking at RELL is that the underlying business is viable and dominates the intrinsic value, even though it is difficult to quantify what the fair value is.

Annualized on its most recent quarterly sales, the company is expected to generate $180 million in sales this year. This leaves the company with a current market capitalization of less than $150 million.

Given its balance sheet cash position, with RELL trading at less than 1 times sales, there’s a case to be made for a relatively reasonable valuation for the high-tech engineering electronics manufacturer. At the same time, uncertainty about the revenue recovery timeline and declining sales trends place RELL in the potential “value trap” category, where there is a risk that results will continue to disappoint.

final thoughts

We rate RELL a Hold, acknowledging its current weakness compared to some strengths in its fundamentals. We believe it is likely too late for shareholders to sell after this decline, which has likely already had a number of negative effects on the situation.

The first step in a stock rebound is for operating and financial trends to stabilize for at least the next few quarters. Unfortunately, we haven’t seen any evidence for this yet. Management believes things will improve, but performance over the past year leaves plenty of room for skepticism.

If you are looking at the stock for the first time, put RELL in avoid category. There is a lack of near-term catalysts to suggest a sustained upside. Monitoring points over the next few quarters will be signs of sequential sales improvement, gross margin trends and cash flow levels.