RELL - Richardson Electronics: Poor Quarterly Results

2024-01-14 07:11:15 ET

Summary

• Richardson Electronics' Q2 FY24 results show a decline in net sales and profitability, with underperforming segments and declining margins.
• RELL stock price has already corrected, but it remains a risky investment option due to ongoing challenges.
• Technical analysis suggests that the stock is currently bearish and may continue to fall, making it a dangerous time to create a new position.

I last wrote on Richardson Electronics ( RELL ) in October 2023, and I told you to avoid it due to weak results, market conditions, and price chart. Its share price has corrected around 7% since then. It recently announced its Q2 FY24 results. Its margins are declining, which is affecting its profitability. Even after the correction, I believe RELL is still a risky investment option. Hence, I assign a hold rating on it.

Financial Analysis

It recently announced its Q2 FY24 results . The net sales for Q2 FY24 were $44.1 million, a decline of 33% compared to Q2 FY23. Its Canvys, green energy solutions [GES], and power and microwave Technologies [PMT] segments underperformed, which led to a significant decline in sales. The sales from the Canvys segment declined by 27.6% in Q2 FY24 compared to Q2 FY23. It struggled in North America, which affected its sales in the Canvys segment. Its GES and PMT segment sales declined by 78.8% and 22.9% in Q2 FY24 compared to Q2 FY23. Both this segment continues to face the same headwinds it faced in the first quarter. Its GES segment was affected by lower sales of ultracapacitor modules, and the PMT segment was affected by lower sales to its semiconductor wafer fab customers. Its gross margin for Q2 FY24 was 28.4%, which was 33.1% in Q2 FY23 and 32.8% in Q1 FY24. The decline was mainly due to the under-absorption in the manufacturing facility.

Its net loss for Q2 FY24 was $1.8 million compared to an income of $5.5 million in Q2 FY23. The current situation of RELL looks worse than when I last covered it. The margins are depleting, and as a result, the company has started to report losses; if the margins continue to remain under pressure, then its profitability might take a hit in the coming quarters, which might have a significant impact on its share price. Its share price is already near its 52-week low, and considering its deteriorating financials, its share price might continue to struggle in the coming times. I know there are some positives, like easing inflation, lower interest rates, and a healthy balance sheet. They have no debt and $22.7 million in cash. But I believe there are more risks than the positives. There are no signs of recovery in the semiconductor market, and its GES business is quite new. The company is still exploring market opportunities. Hence, its GES business sales can fluctuate a lot. Sometimes, it might perform well in one quarter and underperform in the following quarter. Hence, considering the risks and positives, I think investing in it can still be risky.

Technical Analysis

It is trading at $10.4. It fell 20% in the Thursday’s trading session and reached the $9.8 level. In the last report, I mentioned that the $9.7 level is strong support for the stock, and after touching the support level, the stock has formed a green candle in the daily time frame. However, RELL is looking bearish in the longer time frame. It has broken the $11 level, and if the stock breaks the $9.8 level, then we might see it continue to fall. So it becomes quite important for the stock to sustain at the current level because the last time stock broke the $9.7 level, it fell around 50%. Hence, I believe the next 30 days will be crucial for this stock, and creating a new position might be dangerous at this time. However, as I said, it is near strong support, and it might also reverse from the current level. So, I would advise investors to stay on the sidelines right now because of the uncertainties.

Should One Invest In RELL?

Even after falling so much in recent times, I think RELL is still not cheap. In fact, considering its quarterly results and future uncertainties, I think RELL is still overvalued. It is trading at a P/E [FWD] ratio of 56.22x, which is way above the sector median of 23.80x. Its PEG [FWD] ratio is 3.75x compared to the sector median of 2.01x. Hence, considering the weak semiconductor market and the infancy of its GES business, I think RELL is still overvalued. Additionally, its stock price is at a crucial level and can fluctuate in the near term. Hence, I see no buying opportunities in it.

Risk

They try to guarantee that consumers have a consistent supply source by keeping big stockpiles. Typically, the industrial machinery that these goods enable is powered by tube technology. The market for their products may contract as businesses replace existing capital equipment with newer models as technology advances. Furthermore, some of their other products see dynamic changes in the market due to the introduction of new technologies, the development of industry standards, the frequent introduction of new products by some of their suppliers, and shifting end-user demand. All of these factors can cause their inventory to lose value or become obsolete. They don't have many long-term agreements with their clients for supplies. They risk building up significant inventories of goods that they might not be able to sell or return to their vendors if they cannot predict their clients' shifting demands or if they misjudge their demand level. Their inventory may lose value as a result of this.

Bottom Line

Its quarterly results were poor. The margins are deteriorating, which is affecting the company's profitability. I think the weak results and weak semiconductor market can affect its share price. There are some positives, like lower interest rates, but I think the risks are more than the positives. Additionally, its price chart and valuation don't provide any opportunities. Hence, I stay with my hold rating.

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