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Electronics distributor Richardson Electronics (NASDAQ:RELL) reported Q3 CY2024 results exceeding the market’s revenue expectations, with sales up 2.2% year on year to $53.73 million. Its GAAP profit of $0.04 per share was also 500% above analysts’ consensus estimates.
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Richardson Electronics (RELL) Q3 CY2024 Highlights:
- Revenue: $53.73 million vs analyst estimates of $49.45 million (8.7% beat)
- EPS: $0.04 vs analyst estimates of -$0.01 ($0.05 beat)
- Gross Margin (GAAP): 30.6%, down from 32.8% in the same quarter last year
- EBITDA Margin: 3.1%, down from 5.6% in the same quarter last year
- Free Cash Flow was -$514,000 compared to -$126,000 in the same quarter last year
- Backlog: $137.4 million at quarter end
- Market Capitalization: $179.5 million
Company OverviewFounded in 1947, Richardson Electronics (NASDAQ:RELL) is a distributor of power grid and microwave tubes as well as consumables related to those products.
Specialty Equipment Distributors
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.Sales Growth
A company’s long-term performance is an indicator of its overall business quality. While any business can experience short-term success, top-performing ones enjoy sustained growth for multiple years. Regrettably, Richardson Electronics’s sales grew at a tepid 4.7% compounded annual growth rate over the last five years. This shows it failed to expand in any major way and is a rough 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 history shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 9% annually. Richardson Electronics isn’t alone in its struggles as the Specialty Equipment Distributors industry experienced a cyclical downturn, with many similar businesses seeing lower sales at this time.
This quarter, Richardson Electronics reported modest year-on-year revenue growth of 2.2% but beat Wall Street’s estimates by 8.7%. Looking ahead, sell-side analysts expect sales to grow 17.4% over the next 12 months, an acceleration versus the last two years. This projection is healthy and illustrates the market thinks its newer products and services will catalyze higher growth rates.
Operating Margin
Richardson Electronics was profitable over the last five years but held back by its large cost base. Its average operating margin of 4.3% was weak for an industrials business.On the bright side, Richardson Electronics’s annual operating margin rose by 1.2 percentage points over the last five years.
This quarter, Richardson Electronics’s breakeven margin was down 2.2 percentage points year on year. Since Richardson Electronics’s gross margin decreased more than its operating margin, we can assume its recent inefficiencies were driven more by weaker leverage on its cost of sales rather than increased marketing, R&D, and administrative overhead expenses.
Earnings Per Share
We track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth was profitable.Although Richardson Electronics’s full-year earnings are still negative, it reduced its losses and improved its EPS by 16.5% annually over the last five years. The next few quarters will be critical for assessing its long-term profitability.
Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business. Sadly for Richardson Electronics, its EPS declined more than its revenue over the last two years, dropping by 42.4%. 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 12.4 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 Q3, Richardson Electronics reported EPS at $0.04, down from $0.08 in the same quarter last year. Despite falling year on year, this print easily cleared analysts’ estimates. Over the next 12 months, Wall Street is optimistic. Analysts forecast Richardson Electronics’s full-year EPS of negative $0.04 will flip to positive $0.66.