RELL - Richardson Electronics: Profitable And Growing Green Energy Business

Summary

• Richardson Electronics has just released another solid quarterly report, a total backlog of $192.6 million and major revenue growth in its newer green energy segment, increasing by 150.3% YoY.
• A small-cap stock rooted in tubes and family origin, it has been around for 76 years and manufactures a massive diversity of niche customized engineered solutions for over 20,000 customers.
• Its green energy solution for wind turbines and high quality synthetic diamonds are the first significant growth catalyst for the company in 60 years.
• Cautious of dependency on one large customer in a secular semiconductor industry and the risks involved with its international manufacturing and selling operations.

Richardson Electronics ( RELL ) is an engineering and manufacturing small-cap stock with a market cap of $314.57 million. The business is rooted in its tube manufacturing and selling history dating back to 1947. RELL has grown to over 20,000 customers by building diverse specialised engineered solutions for specific customer needs that have been niche rather than significant mass growth opportunities. However, sixty years into the game, the company has designed a major money-making solution and is building a profitable and fast-growing green energy business off these patented technologies.

Over the last five years, investors have been rewarded with 174.91% in returns. The business is delivering more substantial top and bottom-line results consecutively. It has just posted another strong quarter, with a massive backlog across many of its solutions, and there is a significant untapped market for its wind turbine battery replacement offering. Therefore investors may want to take a bullish stance on this stock.

Company overview

At first glance, it may seem strange that a company of 76 years, with over 20,000 global customers and 24 international subsidiaries, is still a small-cap stock. RELL has been run with an engineering mindset, focused on building numerous critical products for customer-specific needs. This has led to many products in their long history, but not necessarily a large number of scalable and profitable solutions. The history of the business lies in selling war surplus tubes to broadcasters across the USA, airlines, and railroads, all using tubes in their systems. Today it is a global engineering and manufacturing company with four diverse business segments rooted in its tube and family-run origins.

One solution that has become a success story and is a significant growth catalyst for RELL is its patented ultracapacitor modules that replace lead-acid batteries primarily in wind turbines. This design has led to severe growth for the company, and green energy has become such an essential part of the business that it has been included as a business segment since FY23 under GES.

Business segments

In the table below, we can see the business segments according to their Q2 2023 sales performance , and I will describe them briefly. Although the many diverse, unique engineered solutions and offerings are immense, their competitive advantage is providing customers with niche solutions to their businesses.

First up is the Power & Microwave Technology ((PMT)) group, which has been the most significant part of the business. It grew from $100 million to $120 million in FY22, with a considerable backlog. RELL makes magnetron tubes for many different purposes, from weather radar systems, semiconductor markets, aviation, and microwave applications. We can see that PMT sales increased YoY by 10.2% to $40.5 million.

Second is the newly established and most exciting Green Energy Solutions ((GES)) segment which has broken off from the PMT segment since 2023. GES sales grew by 150.3% YoY to $12.3 million in Q2 2023. Growth has been from its ULTRA3000 and related product sales. Furthermore, it has a magnetron tube that can build up to three carats of synthetic diamonds. Synthetic diamonds have a majorly upward demand in Asia, with one particular tube growing from 800 orders to 5000 orders this year. There has also been an increase in sales in the EV market. The company expects FY23 sales to be around $40 million, with a growth rate of 15-20% per year.

The third is the Canvys business which makes custom medical-grade displays primarily for particular OEMs. Each display is customized to healthcare equipment for a specific healthcare company, generally going through an FDA approval process and providing long-term usage. We can see that Canvys sales increased by 10.2% YoY to $10.1 million in Q2 2023. Demand is mainly from North America, and a healthy backlog, with an expectation of $40 million for the full financial year.

Lastly is the Healthcare business, which focuses on building large CT tubes. The firm makes roughly 300 tubes per year but has a manufacturing capacity of up to 1000. Due to the limited number of tubes built, the company loses, on average, $5 million to the healthcare business, although RELL made $15 million for FY22, including this loss. We can see that for Q2 2023, healthcare revenue decreased YoY to $2.9 million. However, this was due to equipment issues rather than a lack of sales. The business has a CT tube program with Siemens (SIEGY) that is expected to deliver positive results this financial year.

Financials and valuation

RELL has beaten EPS expectations for the last three quarters. Most recently, the company posted its Q2 2023 quarterly financial results, beating EPS expectations by $0.10 to reach an EPS of $0.39 and beating revenue expectations by $1.41 million to reach $65.91 million. We can see that the business has been improving its top and bottom-line performance over the last three years, with significant tailwinds from its GES business segment.

The company has improved its profit margin YoY for the quarter from 7.6% in Q2 2022 to 8.4% in Q2 2023, and this was primarily due to producing increased revenue. The gross margin increased from 32.7% to 33.2% for Q2 2023. The net income for Q2 2023 was $5.5 million compared to $4.1 million the prior year. If we look at the company's backlog across all of its business segments, it reported $192.6 million in Q2 2023, an increase of 31.10% year on year. The balance sheet is healthy, with total cash of $31.11 million and total debt of $2.53 million. It is very liquid, with a current ratio of 3.89 and a quick ratio of 1.55. The total debt-to-equity ratio is 1.71%. RELL has a dividend program. Its ex-dividend date is 2 February for those interested. It has a forward yield of 1.17% and has declared $0.06 per share.

RELL is an under-the-raider small-cap stock that has received little analyst interest, often due to its complex and diverse range of businesses. However, its incremental YoY quarterly growth and entrance into the wind terminal industry is something to take seriously. It is ranked as a Buy and 2 rating by Zacks Rank, evaluated within the electronics-parts distribution industry. It has a forward price-to-earnings ratio of 14.15, a price-to-book ratio of 2.12 and a good enterprise value-to-sales ratio of 1.14. The company has performed better than the S&P500 index over the last year, and we can see double-digit year-on-year growth of 23.11%.

Risks

RELL offers diverse, highly complex and niche-engineered solutions with high costs, especially if the company does not have sufficient demand. We have seen this in the healthcare business with an underutilized capacity for 1000 tube production, leading to losses for the company. Furthermore, some of its products require FDA approval before being commercially produced, which can take time and add on costs. However a growing focus on sales and a target of reaching 500 tubes sold at high prices will bring profitability to the sector. Another concern is that RELL's most significant revenue-generating customer, LAM Research ( LRCX ) is in the highly secular semiconductor business. If there is another secular downturn in the industry, this immediately impacts RELL's growth potential. RELL is an international company with manufacturing facilities in various countries, including China. The company is faced with geopolitical factors such as the impact of foreign exchange, additional tariffs from the US, or delay in manufacturing due to its international supply chain disruption.

Final thoughts

RELL has a vast diversity of engineered solutions for many different types of customers. It is challenging to place this company under one umbrella term. However, one thing we can see is that the company is driven by delivering high-end solutions. After 60 years, one of these solutions is not only suitable to a niche customer but is relevant to the entire wind turbine industry. This patented solution to replace batteries is a game changer for the company. We see it in the upward trending top and bottom line performance, increasing backlog and huge untapped market potential. Therefore investors may want to take a bullish stance on this company with an already profitable green solution.

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