Micro-Cap Richardson Electronics Pulls Back in a Buy


Headwinds cut Richardson Electronics results

Richardson Electronics (NASDAQ: RELL) is a micro-cap company in business with the big boys. The company manufactures a wide range of power and microwave components for the communications, display and healthcare industries, so it is well supported by secular trends. The good news from the FQ3 report is that business is still strong and backlogs are growing. The bad news from the report is that headwinds within the economy are having an impact on businesses and specifically on earnings. Freight costs have deeply reduced at least one of the three operating segments and cost the company several hundred basis points of margin. The news sent the stock down more than 5%, but we believe this is a buying opportunity.

The opportunity of 5G alone is an opportunity that can and will sustain business growth for many years to come and is an irresistible force for institutions as well as for us. Institutional activity has been fierce over the past 5 quarters but is skewed in favor of the bulls. However, their activity turned bearish in the third and fourth quarters of 2021, but this trend ended in the first quarter of 2022 when the institutions recovered around half a percent of the shares. This activity helped put a floor in the price action at $11 which still provides support today.

Richardson Electronics stumbles upon mixed results

Richardson Electronics had a mixed quarter in which demand and sales were offset by supply chain hurdles and transportation costs that led to a sequential decline in profits. Revenue of $55.3 million is up 22.3% from last year and the 7th quarter of sequential growth, but growth is slowing under the influence of these 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.

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On the earnings side, the company saw a 310 basis point decline in gross margin due to mix and freight. This was offset by a significant expansion in operating margin, but there is a factor 1 to consider. The company suffered a legal charge last year that has not reoccurred this year and it was a significant chunk of last year’s profits. The takeaway is that earnings are up from last year’s $0.02, but EPS of $0.21 is down sequentially and earnings will continue to come under near-term pressure at less. Looking further ahead, we still expect the supply chain to improve in the second half of the year, but we are still a few months away.

Richardson Electronics is a safe micro-cap dividend

Richardson Electronics is a reliable dividend payer with a yield of 1.9%. The payout is around 28% of TTM’s earnings (there are no analyst estimates for this stock) and the balance sheet is rock solid. The company’s cash balance is down slightly on a year-over-year basis, but inventory is up, cash flow is still strong, and there’s no debt to speak of. In our view, investors shouldn’t expect to see the dividend increase, but they can rest easy knowing that the yield will not be reduced or suspended.

The technical outlook: Richardson Electronics falls in support

Richardson Electronics fell more than 7% following the third-quarter earnings report, but the move was welcomed by buyers. This level is higher than the average purchase price for the 3 quarters out of the last 5 during which establishments were net buyers of the security. Assuming this action continues, we expect Richardson Electronics to bottom near the $11 level and then move sideways until the economic headwinds dissipate. If that happens, revenue and earrings could accelerate, but we’ll see about that.

Micro-Cap Richardson Electronics Pulls Back in a Buy

Should you invest $1,000 in Richardson Electronics right now?

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