RELL - Richardson Electronics: A Good Choice For Growth Investors

2023-06-28 06:20:01 ET

Summary

• Richardson Electronics offers solid fundamentals, attractive ROCE, and growing financial metrics, making it a suitable investment for growth investors.
• The company has a promising dividend policy and appealing valuation, but its lack of sufficient cash flows raises concerns about dividend sustainability.
• RELL's undervalued status presents a good entry point for potential investors seeking a growth stock with strong fundamentals and returns.

Investment Thesis

Richardson Electronics, Ltd. ( RELL ) is involved in power and microwave technologies, customized display solutions, and healthcare industries in North America, the Asia-Pacific, Europe, and Latin America. The company is promising given its solid fundamentals, such as attractive ROCE and other growing financial metrics, which make the stock attractive for growth investors.

It also has a good dividend policy and an appealing value. I am confident that the firm's long-term growth and sound financial footing will be supported by the substantial advantages it enjoys over its rivals . In light of this, I think the stock is fairly valued and could be a solid investment for growth investors.

Why RELL Suits Growth Investors

Growth investors are interested in stocks that are experiencing above-average financial growth, as this characteristic helps these securities attract market attention and produce strong returns. These stocks are more volatile and risky than average. Betting on a firm that has reached the end of its growth story, or is close to reaching that point, can be extremely risky. I have highlighted three reasons why I believe shares of this electronic components and communication equipment firm are a superb growth buy.

To begin with, its earnings growth is attractive. Earnings growth is arguably the most crucial factor, as rising profits are the ultimate goal for most investors. Earnings growth in the double digits is extremely desirable for growth investors since it typically indicates a bright future for the business being evaluated.

Investors should look beyond RELL's 117.77% YoY EPS growth rate in the past to its projected growth in the future. The projected growth in earnings per share for the year is 109.77%, which is significantly higher than the projected increase of 9.91% for the industry.

Secondly, the company has a very pleasing cash flow growth. All businesses need a steady cash flow stream, but rapid cash flow growth is especially useful and crucial for expanding businesses. This is because firms with substantial cash reserves can start new initiatives without having to seek costly external financing. While investors should analyze current cash flow growth, it's also worth looking at the historical rate to contextualize the current growth. Over the last 3-5 years, the company's annualized cash flow growth rate has been 44.4%, compared to the industry average of 24.3%.

Lastly is its promising earnings revisions. The superiority of a stock in terms of the variables mentioned above can be evaluated further by examining the trend in earnings estimate revisions. A positive trend is, of course, advantageous here. According to empirical evidence, there is a high correlation between trends in earnings estimate revisions and short-term stock price changes. Current-year earnings forecasts for the company have been revised upward, leading me to an optimistic status regarding the company's future share prices.

Growing ROCE

In a perfect environment, we would like to see a company invest more capital in its business, and the returns on that capital would also be rising. This demonstrates that the company is a compounding machine that can perpetually reinvest profits into the business and generate greater returns. When I examined this company's ROCE trend, I was very impressed. This is because it has been growing steadily since 2021.

RELL's increased ROCE has not been a letdown. In particular, over the past five years, the firm has kept capital employed relatively stable while increasing ROCE by 1,910%. My conclusion is that the company has become more efficient, which has allowed it to generate greater earnings without increasing its capital expenditures.

RELL appears to be becoming more adept at generating returns, as capital employed has remained stable while earnings have increased. And a phenomenal 109% total return over the last five years indicates that investors anticipate even better things in the future.

The Dividend Situation

In the most recent dividend announcement, RELL committed to pay a dividend of $0.06. While a high dividend yield is always desirable, we must also assess whether the payment is feasible. Prior to this announcement, the company's earnings easily covered the dividend, but its free cash flow was negative. I consider cash flow more essential than earnings in general; therefore, I would be wary about relying on the sustainability of the dividend.

The business has a long history of consistently paying dividends with slight variation. The most recent full-year payment was $0.24, whereas the annual payment in 2013 was $0.20. Over that period, this equates to a compound annual growth rate ((CAGR)) of almost 1.8% every year. Although dividend growth has been very moderate, which is not ideal, some investors might admire the payout's relative constancy.

Potential buyers of the stock may be impressed by its solid track record of making timely payments. I'm glad to note that the company's EPS has increased over the past five years. With a low payout ratio, the corporation has plenty of room to maneuver, and rising profits make it possible to increase the dividend in the years to come.

It's encouraging to see that the dividend hasn't been reduced, but I'm wary of the payout because it may have trouble being maintained in the future without sufficient cash flows. Although RELL's earnings are sufficient to meet obligations, insufficient cash flows exist. I would exercise some caution before counting on the dividends from this stock as my primary source of income.

Valuation

Over the course of the past 52 weeks, RELL's share price ranged from a high of $27.24 to a low of $13.72. Some share price swings may give investors a better opportunity to enter the stock and buy it at a lower price. The $16.93 price tag raises the question of whether or not this stock is reasonably valued. The company is trading at a discount compared to its peers in the Electronic business, as measured by the price-to-earnings ((PE)) ratio, which shows that RELL's ratio of 9.25x is lower than the average of 24.57x for the industry. This, in my view, makes this a good entry point with very strong fundamentals and pleasing returns.

Conclusion

RELL is a very interesting company for growth-oriented investors, as its solid growth metrics show. Its relatively stable dividend policy makes it a good dividend stock with future growth potential. However, the absence of decent cash flows makes me skeptical about its dividend sustainability. With its valuation metrics showing the company is undervalued, I think this offers a cheaper entry point for potential investors seeking a growth stock.

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