Micro-Cap Richardson Electronics Pulls Back Into A Buy

Headwinds Cut Into Richardson Electronics Results 

Richardson Electronics NASDAQ: RELL is a micro-cap company in business with the big boys. The company makes a wide range of power and microwave-related components for the communications, display, and healthcare industries so it is well supported by secular trends. The good news in the FQ3 report is that business is still strong and the backlogs are growing. The bad news in the report is that headwinds within the economy are impacting business and specifically the bottom line. Freight costs cut deeply into at least one of the three operating segments and cost the company several hundred basis points in margin. The news caused the stock to pull back more than 5% but we think this is a buying opportunity. 

The opportunity in 5G alone is one that can and will sustain business growth for many years and is a compelling force for the institutions as well as for us. The institutional activity has been fierce over the past 5 quarters but is biased in favor of the bulls. Their activity turned bearish in Q3 and Q4 of 2021, however, but that trend ended in Q1 of 2022 when the institutions picked up about a half percent of the shares. This activity helped put a bottom in price action at $11 that is still providing support today. 

Richardson Electronics Falls On Mixed Results 

Richardson Electronics had a mixed quarter in which demand and sales were offset by supply chain hurdles and freight costs that resulted in a sequential decline in earnings. The revenue of $55.3 million is up 22.3% from last year, however, and the 7th quarter of sequential growth but the growth is slowing under the influence of those headwinds. The good news is that all three business units saw growth led by a 25% increase in PMT, a 15% increase in Canvys, and a 7.4% increase in Richardson Healthcare. 

Moving down to the earnings, the company posted a 310 basis point decline in the gross margin due to mix and freight. This was offset by a significant widening of operating margin but there is a 1-off factor to consider. The company was incurred a legal charge last year that did not reoccur this year and it was a significant portion of earnings last year. The takeaway is that earnings are up from last year’s $0.02 but the $0.21 in EPS is down sequentially and earnings will continue to be pressured in the near term at least. Longer-term, we are still expecting to see some supply chain improvement in the back half of the year but we’re still a few months away from that. 

Richardson Electronics Is A Safe Micro-Cap Dividend 

Richardson Electronics is a reliable dividend payer with a 1.9% yield. The payout is about 28% of the TTM earnings (there are no analysts’ estimates for this stock) and the balance sheet is rock-solid. The company’s cash balance is down slightly on a YOY basis but inventory is up, cash flow is still ample, and there is no debt to speak of. In our view, investors should not expect to see the dividend increase but they can sleep soundly at night knowing the yield won’t be cut or suspended. 

The Technical Outlook: Richardson Electronics Falls To Support 

Richardson Electronics fell more than 7% in the wake of the FQ3 earnings report but the move was met by buyers. This level is above the average buying price for the 3 quarters out of the last 5 in which the institutions were net buyers of the stock. Assuming this action continues, we expect to see Richardson Electronics put in a bottom near the $11 level and then trend sideways until economic headwinds dissipate. If that happens revenue and earrings may accelerate but we’ll see about that.