Don White
A year ago, I wrote an article about Richardson Electronics (NASDAQ:RELL) titled Richardson Electronics Is Cutting Edge, Profitable, And Growing Yet Trades Below Book. At that time, I categorized it as a turnaround play. A stock that had performed poorly for years and been left for dead by investors, despite strong recent evidence of a turnaround. The stock was trading at $8.00 and I placed a one year price target of $14.00. It is now one year later and the stock has risen to $15.79.
If you are a value investor, it’s still a value. It’s trading at a run rate PE ratio of about 10 despite increasing growth. But RELL is now also in the early stage of full throttle growth. It has at least four major new product lines just coming to market or in beta testing in secular growth industries. Three already have large orders. All are potentially large markets that are less cyclical than most. In fact, three of them are EVs, wind power, and lab grown diamonds.
I believe the opportunity today is as great as a year ago despite the doubling of the stock. This is due to the transition to a growth company. The stock trades at a forward PE ratio of about 10. The market has recognized the turnaround but not the growth story.
Background
Richardson is an electrical components manufacturer and distributor based in La Fox, Illinois. It designs or manufactures over half its products and serves as a distributor for the rest. The distributor business is value added so it gets better margins than most distributors. They often help their customers with engineering or other custom services. The customer base is diversified with its largest customer at about 10% of revenues. It’s also very diversified by the industries of its customers.
The company was founded in 1947 by the current CEO Ed Richardson’s father. Mr. Richardson has been with the company about 60 years and is now 80. His mother worked there until she was 95 and he does not plan to retire. Mr. Richardson owns 15.2% of the common stock and 98.2% of the Class B common stock. That gives him control with 62.5% of the voting rights. He plans a book shortly about the company history called Never Give Up.
Financial Results
Financial results over the last five fiscal years are shown below.
Richardson forms 10-K
As shown above, the company was operating close to breakeven with declining sales in the three years ended May 2020. The worst year was YE 5/20 when revenues fell 6%. Sales began to pick up in FYE 5/21 and accelerated, growing by 27% in FYE 5/22.
The company has been losing at least $5 million per year with its CT tube aftermarket business started from scratch about seven years ago. This level of loss goes back many years. That business has been very slow to develop but is starting to get traction. In the shaded line in the
