Richardson Electronics: Strong, Long-Term Play (NASDAQ:RELL)

Richardson Electronics, Ltd. (NASDAQ:RELL) has been one of the companies that have defied the odds over the last couple of years, continuing its ascent from trading at about $4.31 per share on December 21, 2020, to $21.59 at close of November 17, 2022.

After a pullback in September 2022 to a little under $14.00 per share, the company once again got favorable winds at its back, and since has soared to a 52-week high of $24.60, before pulling back to the $21.59 mark.

A lot of the recent momentum came from its latest earnings report, where it showed all it segments growing, and a solid backlog of just under $200 million heading into 2023.

In this article we’ll look at some of its recent numbers, how each segment has been performing, and what the future looks like for the company.

Latest earnings

Revenue in the first fiscal quarter of 2023 was $67.6 million, up 25.8 percent from the $53.7 million in revenue generated in the first fiscal quarter of 2022. All four segments of the company produced higher sales in the quarter.

Earnings per share for the reporting period was $0.45, up from the $0.20 per share in the first fiscal quarter of 2022.

Net income in the quarter was $6.3 million, or 9.4 percent of net sales, an increase from the $2.6 million, or 4.9 percent of net sales from last year in the same reporting period.

Gross margin was 34.1 percent of net sales, up from the 30.3 percent of net sales in the first quarter of last year.

Operating income was $8.8 million or 13 percent of net sales, an improvement for the $2.8 million or 5.3 percent of net sales year-over-year.

As a result of higher employee compensation expenses, operating expenses in the quarter climbed from $13.5 million in the first quarter of fiscal 2022 to $14.2 million in the reporting period. As a percentage of net sales operating expenses were down to $21.1 percent from the 25.1 percent in the first quarter of fiscal 2022. Overall backlog was $199.2 million in the first fiscal quarter of 2023, down from the $206.2 million last year in the same reporting period. The majority of the decline was attributed to its Canvys unit.

At the end of the quarter RELL had cash and cash equivalents of $30.6 million, down from the $35.5 million it had at the end of May 2022.

Breaking down the segments

Power & Microwave Technologies (PMT)

PMT is the largest contributor to the revenue generated by the company, accounting for $45.4 million of the $67.6 million in revenue generated by RELL in the quarter, up 12 percent or $4.9 million year-over-year. Gross profit in the segment was $15.5 million, up from the $12.2 million in gross profit in the same quarter last year.

Gross margin in the reporting period improved from 30.1 percent last year in the same quarter to 34.3 percent. The improvement came from a favorable product mix and a strong performance from its semiconductor wafer fabrication and equipment business, especially its Electron Device Group or EDG, which grew market share as it finds new use cases for it tube products.

Green Energy Solutions Groups

Green Energy Solutions Groups (GES) is a new reporting segment for RELL. What the company did there was look at customers within its PMT segment that were offering green solutions to the market and decided to create the new segment and report them here.

Here’s how RELL defines the new segment:

GES combines our key technology partners and engineered solutions capabilities to design and manufacture products for the fast-growing alternative energy storage market and power management for green applications.

Revenue from GES in the first fiscal quarter was $8.5 million, up $5.9 million or 230.7 percent from the $2.6 million in revenue generated in Q1 of 2022. Gross profit in the quarter came in at $3 million, up from the $744,000 in the same reporting period last year.

Margin improved from 28.9 percent last year in the same quarter to $35.5 percent in the reporting period. That was attributed to product mix and improvement in its manufacturing efficiencies. GES has $56.3 million in backlog. That should be a significant tailwind for the company over the next year or so.

A major headwind that could limit the performance of PMT and GES in the near term is ongoing supply chain issues that contribute to long semiconductor lead times.

Richardson Healthcare

Revenue from Richardson Healthcare in the first fiscal quarter of 2023 was $3.3 million, up $1 million or 45.5 percent from last year in the same quarter. The company reported that all product lines in the Healthcare segment had higher sales year-over-year.

Gross profit in the quarter was $1.2 million, more than double the gross profit of $548,000 in Q1 of fiscal 2022.

Gross margin was 36.7 million, a 2.4 percent increase over the 24.3 percent gross margin of the first fiscal quarter of 2022. The improvement in gross margin was from a decline in costs of components scraps and “improved manufacturing absorption.” The major thing to follow in the Healthcare segment is how its Siemens program progresses.

It is a reference to its Siemens Repaired Tube program, which “is a series of four tube types including the Stratton Z, MX, MXP and MX P46.”

In the near-term Stratton Z will be the tube to watch, as it is now in beta site testing and is expected to be released in the latter part of calendar 2022. The three tubes associated with the MX series are scheduled for release in calendar 2023.

If the Siemens program is successful, it’ll be a factor in improving the profitability of RELL as a percentage of sales.

Canvys

Its Canvys segment “engineers, manufactures and sell custom displays to original equipment manufacturers in industrial and medical markets throughout the world.”

In the first fiscal quarter of 2023 it generated $10.4 million in revenue, up $2 million or 23.4 percent year-over-year, a new company record for the unit. Strong demand in the North American market was the major catalyst for the improvement in sales.

Gross profit for the division was $3.3 million, against the $2.8 million in gross profit from the first fiscal quarter of 2022.

Gross margin in Canvys was 31.4 percent, down from 33.4 percent in the same quarter last year based upon FX effects and product mix. Based upon its backlog, management expects to have strong sales in fiscal 2023 and fiscal 2024. That said, those expectations assume there are no disruptions in the supply chain that would stop projects from going forward, or if the recession goes deeper for longer, which could reduce current demand for its products.

To mitigate supply chain risks the company increased inventory in the quarter to compensate for extended lead times. Since inventory is “earmarked for specific customers,” RELL believes supply chain risk is minimal. Another way some of the risk has been mitigated is some of its customers have paid the company to hold inventory above its usual rate of usage in order to have enough parts available if there are significant supply chain disruptions.

Assuming limited supply chain effects, the current backlog of the division should allow it to continue to improve in fiscal 2023. Doing so while improving gross margin is important for improving its contribution to the overall performance of RELL.

Conclusion

The company has been producing some good results, and shareholders have been rewarded by a surge in its share price over the last couple of years. After its big jump from about $14.00 per share on September 19, 2022, to its 52-week high of $24.60 on October 31, 2020, the question that needs to be answered is whether or not the outlook for the company over the couple of years has already been priced in.

Taking into consideration the total backlog of the company, the way forward seems to be optimistic, but uncertainty about the economy and supply chain restraints could undermine the demand the RELL has for its products.

On the other hand, once there’s more clarity concerning inflation and how the Federal Reserve responds to it, RELL is likely to get another boost once the Fed takes its foot off the interest rate hike pedal.

With no way of knowing how deep the recession will be and its duration, the performance of RELL over the next several quarters can’t be ascertained. For that reason, I’m a little concerned about how it’s going to do after such a prolonged increase in its share price in difficult economic conditions.

Taking tailwinds and measuring them against the headwinds, it seems to me the tailwinds are a more powerful factor in the performance of the company at this time, but that could change quickly if macro-economic conditions turn against the company.

One positive thing that has occurred year-over-year is that revenue in North America has increased as a percentage of sales, almost equal to APAC and Europe. In the geopolitical and economic challenges the company faces, that could be positive if things get worse in the months ahead.

Taking everything together, RELL still looks like a strong, long-term play, but in the near term it could pull back and correct, based upon its increase in share price over the last couple of years, and lack of visibility from economic and geopolitical factors that could be significant headwinds for a period of time.