Interesting Net-Net Stock: Richardson Electronics (RELL)

Richardson Electronics Ltd (RELL) was founded on May 31, 1947 and is a provider of engineered solutions, power grid and microwave tubes and related consumables, and customized display solutions.

RELL has three operating and reportable segments:

– Power and Microwave Technologies Group (“PMT”)

– Canvys (Visual Technology Solutions)

– Healthcare manufactures

Company operates in geographic regions such as North America, Asia/Pacific, Europe and Latin America.

Richardson Electronics is a business run by Mr. Edward Richardson (Chairman of the Board, President, Chief Executive Officer) who controls the business through voting shares – representing approximately 66% of the voting power of the outstanding common stock.

 

Problems

RELL’s problem has been a large global operating structure and not enough business to justify its existence. During fiscal 2016, approximately 54% of company’s sales were made outside the U.S. RELL employed 373 full-time individuals. Of these, 241 were located in the United States and 132 were located internationally. RELL is also dependent on a limited number of vendors to supply them with essential products.

Finally management has admitted the problem and taken corrective measures. First is to decrease global organization and shrink its structure. Reduce cost of goods sold and above all S,G&A costs are key factors. These will help the biggest part of the company, Power and Microwave Technologies Group (“PMT”), to become profitable.

Other solution is grow the business. To make it – and make it profitable – it’s always easier to say than to do. Healthcare business is a great opportunity. Although it’s still the smallest business unit, it grows strong annually and has solid margins. I think management is credible with its claims to make necessary changes and achieve a turnaround.

 

Fundamentals

Richardson Electronics balance sheet is still quite a strong. Current ratio is 5.7 and quick ratio 3.8. Company has no debt and pay a steady dividend – yield is comfortable 3.5 %.

RELL’s F-Score is satisfying 4 and Z-score is good 4.20 which show that the company operate on a sound base.

Gross margins widened from 29.28% to 31.16% compared to the same period last year. RELL’s improvement in gross margin has been accompanied by an improvement in its balance sheet as well. This suggests that gross margin improvements are likely from operating decisions and not accounting gimmicks.

Company’s book value has been stable during last 4-5 years and its burning rate is not worrying – especially if the turnaround to profitability will be successful.

With hindsight we can criticize company and its management because they have not been more effective buying back shares when the market price was below 6 USD.

 

Valuation

Company is still unprofitable, but it has taken steps to make a turnaround. Market has recognized positive signs and stock price has increased from 5½ to 7 during the last one and half month. Current price 6.94 per share gives about 20 % margin of safety to net current asset value (8.53) and little over 30 % to tangible asset value.

Like all net nets RELL is still dirty cheap. All positive movements in business will affect right away to stock price.

I think the company is at the moment quite a safe and there is not a whole lot of risk on the downside. RELL is paying stable dividends already many years. Even if market collapse or interest rate increase there is good downside protection.

 

Conclusion

I purchased RELL first 9th September 2015 for 6.05 so the stock has already advanced somewhat to today’s price 6.94. Maybe the best time to buy was last February when the stock price went down briefly under 5 USD per share.

Last quarter RELL showed positive EBITDA income and if it can (reduce extra costs and grow revenue) move it to last row which should be possible during the next 12 months company could earn double digit market price.

I will stay as a shareholder and I think it’s not too late to jump in even the best buying places are probably left behind.

 

The author has a position in Richardson Electronics Ltd (RELL). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.

 

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