Richardson Electronics (RELL)

Electronics distributor Richardson Electronics (NASDAQ:RELL) fell short of the market’s revenue expectations in Q1 CY2025 as sales rose 2.7% year on year to $53.8 million. Its non-GAAP profit of $0.11 per share was 37.5% above analysts’ consensus estimates.

Company Overview

Founded in 1947, Richardson Electronics (NASDAQ:RELL) is a distributor of power grid and microwave tubes as well as consumables related to those products.

Historically, specialty equipment distributors have boasted deep selection and expertise in sometimes narrow areas like single-use packaging or unique lighting equipment. Additionally, the industry has evolved to include more automated industrial equipment and machinery over the last decade, driving efficiencies and enabling valuable data collection. Specialty equipment distributors whose offerings keep up with these trends can take share in a still-fragmented market, but like the broader industrials sector, this space is at the whim of economic cycles that impact the capital spending and manufacturing propelling industry volumes.

Competitors in the electronic distribution industry include Arrow Electronics (NYSE:ARW), Avnet (NASDAQ:AVT), and TTM Technologies (NASDAQ:TTMI).

Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Regrettably, Richardson Electronics’s sales grew at a tepid 4.9% compounded annual growth rate over the last five years. This was below our standard for the industrials sector and is a tough starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Richardson Electronics’s performance shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 12.3% annually. Richardson Electronics isn’t alone in its struggles as the Specialty Equipment Distributors industry experienced a cyclical downturn, with many similar businesses observing lower sales at this time.

This quarter, Richardson Electronics’s revenue grew by 2.7% year on year to $53.8 million, falling short of Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 14.1% over the next 12 months, an improvement versus the last two years. This projection is healthy and indicates its newer products and services will fuel better top-line performance.

Richardson Electronics’s unit economics are better than the typical industrials business, signaling its products are somewhat differentiated through quality or brand. As you can see below, it averaged a decent 31.6% gross margin over the last five years. Said differently, Richardson Electronics paid its suppliers $68.44 for every $100 in revenue.

Richardson Electronics’s gross profit margin came in at 31% this quarter, marking a 1.5 percentage point increase from 29.5% in the same quarter last year. Richardson Electronics’s full-year margin has also been trending up over the past 12 months, increasing by 1.8 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as manufacturing expenses).

Richardson Electronics was profitable over the last five years but held back by its large cost base. Its average operating margin of 3.8% was weak for an industrials business.

Looking at the trend in its profitability, Richardson Electronics’s operating margin decreased by 2.1 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Richardson Electronics’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

In Q1, Richardson Electronics generated an operating profit margin of negative 5.1%, down 7 percentage points year on year. Conversely, its revenue and gross margin actually rose, so we can assume it was less efficient because its operating expenses like marketing, R&D, and administrative overhead grew faster than its revenue.

Revenue trends explain a company’s historical growth, but the change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Sadly for Richardson Electronics, its EPS declined by more than its revenue over the last two years, dropping 74.7%. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.

We can take a deeper look into Richardson Electronics’s earnings to better understand the drivers of its performance. Richardson Electronics’s operating margin has declined by 15.9 percentage points over the last two years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q1, Richardson Electronics reported EPS at $0.11, up from $0.05 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Richardson Electronics’s full-year EPS of $0.12 to grow 483%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Richardson Electronics broke even from a free cash flow perspective over the last five years, giving the company limited opportunities to return capital to shareholders.

Taking a step back, an encouraging sign is that Richardson Electronics’s margin expanded by 3.7 percentage points during that time. The company’s improvement shows it’s heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability fell.

Richardson Electronics’s free cash flow clocked in at $4.05 million in Q1, equivalent to a 7.5% margin. Its cash flow turned positive after being negative in the same quarter last year, building on its favorable historical trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Richardson Electronics historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 7.7%, somewhat low compared to the best industrials companies that consistently pump out 20%+.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Richardson Electronics’s ROIC has unfortunately decreased. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

Richardson Electronics is a well-capitalized company with $36.68 million of cash and $2.04 million of debt on its balance sheet. This $34.64 million net cash position is 26.3% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by how significantly Richardson Electronics blew past analysts’ EPS and EBITDA expectations this quarter. On the other hand, its revenue missed. Overall, we think this was a decent quarter with some key metrics above expectations. The stock traded up 4.7% to $10.24 immediately following the results.

Updated: May 21, 2025 at 11:26 PM EDT

When considering an investment in Richardson Electronics, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

Richardson Electronics doesn’t pass our quality test. First off, its revenue growth was uninspiring over the last five years. And while its projected EPS for the next year implies the company’s fundamentals will improve, the downside is its declining EPS over the last two years makes it a less attractive asset to the public markets. On top of that, its low free cash flow margins give it little breathing room.

Richardson Electronics’s P/E ratio based on the next 12 months is 13x. While this valuation is fair, the upside isn’t great compared to the potential downside. There are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $9.50 on the company (compared to the current share price of $9.17).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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