Will Richard Electronics' Rare Mix Of Growth And Value Outperform In A Volatile Market?

By StoryTrading

– Fundamentals well positioned with solid growth in the forecast

– Several near-term catalysts possible with green energy deals

– Sentiment is bullish, although management lacks charisma 

– Technical analysis provided by Rexman who says RELL’s 15s breakout, is all-time trend breakout, which can spark long-term uptrend

In today’s rocky markets, finding a stock that has an ideal combination of growth and value can be difficult, but Richard Electronics RELL, a LeFox, Ill.-based engineer services company, may have what it takes. 

Our StoryTrading community has been following RELL for several months, prompted and spear-headed by community member, Julian Glatt. As a result of extensive due diligence including an interview of the management team, our founder Ben Rabizadeh recently provided a comprehensive video overview on the stock through the lens of our four pillars: Fundamentals, Catalysts, Sentiment, and Technicals.

Overview

 

RELL was founded in 1947 and provides power grid solutions for customers in hot growing sectors, including alternative energy. The company is profitable and pays a dividend, in addition to carrying a low valuation. 

Among the more notable characteristics of the company is its work with supercapacitors, also known as ultracapacitors, which can be used similarly to lead-acid batteries yet with a lot more efficiency, as well as having the potential to replace lithium-ion power sources or complement them. For more background on supercapacitors, check out this video.

RELL does not manufacture supercapacitors from scratch but engineers them to replace lead-acid batteries in certain use cases, such as wind (Ultra3000), 5G, EV, locomotives, EV charging, and solar. 
 

The benefit of supercapacitors is that they could replace lead-acid batteries in a lot of use cases and last five-to-seven times longer. That bodes well for RELL’s growth in the green energy sector, which accounts for the company’s solid increase in its backlog.

The company is seeing a lot of growth for its Ultra3000 supercapacitor, which is designed for GE wind turbines that use lead-acid batteries that are replaced every 18 to 24 months. With the Ultra3000, the batteries last 14 to 15 years. The company has deals with the top four owner-operators of GE windmills in North America, which could eventually net the company $25 million in annual sales. 

RELL also said there is growth potential for its applications in solar, and the company expects to announce a partnership in the third quarter with one of the largest builders of solar and wind farms in North America. 

Another area of growth for the company is 5G towers, which are powered by lead-acid batteries and are replaced every two to three years. With supercapacitors, the batteries could last from 10 to 15 years.

The company modifies its supercapacitors for each use case and announced a pilot program for its UltraGen3000 product that began in 2021 with T-Mobile, AT&T and Verizon. RELL said it expects a large production order from at least one of these companies in the second half of 2022.

Another growth driver is locomotive batteries. RELL is in talks with two locomotive companies, including Progress Rail, which is a division of CAT. The company received an order in the second quarter from Progress Rail valued at $800,000 and also said locomotives present a $5-million to $6-million opportunity in annual sales. 

On the electric vehicle (EV) and charging front, the company has entered a deal with Vietnam-based VinFast, selling supercapacitors mostly for EV charging. In RELL’s second-quarter conference call, the company said “EV … just boomed ... We have design wins for five different customers … We booked four very large orders for EV charging … multi-million-dollar backlog.” 

The question is, how do all these developments affect the company’s fundamentals?

Fundamentals 

 

The StoryTrading community generated a model that forecasts revenue could be $275 million by 2023. The model also suggests shares could be valued between $20 and $40 by 2023.   

RELL reported revenues increased 27 percent to $54.0 million in the second quarter of its 2022 fiscal year, which ends May 27. Second-quarter operating income rose to $4.5 million, compared with $852,000 in the second quarter of 2021. 

The company’s earnings per share increased to $0.30 in the second quarter of 2022 from $0.05 in the same year-ago period, and from $0.20 sequentially. RELL’s backlog increased sequentially in the second quarter to $146.9 million from $126.5 million.

The company reported $40 million in cash as of the second quarter of its fiscal year and is paying a $0.06 quarterly cash dividend. RELL is guiding for revenues of at least $220 million for its 2022 fiscal year, compared with revenues of $176.9 million in 2021. The company expects full-year earnings per share in the range of $0.90 to $0.95.

 

Catalysts

 

Looking at catalysts, management has stated upside optionality, above and beyond the revenue guidance, will come from the green energy space. The company said to expect a third-quarter announcement with one of the largest builders of solar/wind farms. The company’s third-quarter results are due out April 5, which could be another big beat.

Additionally, the company has agreements in place with the top four owner-operators of GE windmills in North America, which could eventually generate $25 million in annual sales.
 

At the same time, RELL has a 5G pilot program in place with major telecom companies and expects large production orders to hit in the second half. Locomotive orders could also be ramping up, in addition to expansion with EV. 

Sentiment

 

The sentiment on RELL is very bullish in terms of its growth in the green energy segment, with the market still favoring the sector. There is also a greater rotation to value, and RELL could be seen as an ideal and rare mix of a growth and value stock. 

Even so, there are a few negatives that may contribute to why the stock is undervalued, including that RELL is not a pure-play company and it has several divisions and thousands of products. It is unduly attached to past investment, which may however  break even finally. RELL is also likely having a hard time finding enough good engineers to meet demand.

Additionally, the management team lacks charisma and the company continues to invest and lose money in an unrelated health segment. Also, the stock hasn’t broken out in decades, so why now?
 

Technicals

 

StoryTrading consults with technical expert Rexman to identify resistance levels and bull targets. Following is his recent chart and analysis on RELL.

“RELL 15s breakout, at the circle, is an all-time trend breakout, which can spark a long-term uptrend. That would probably trigger a new move to the 20s (all-time highs) and beyond. But, since this has been running since the pandemic, this could be the top right here too, for this 2-year parabolic run. If and only if, RELL can’t break the pennant, or the 15s, it can come back to the 10s, 11s, from a technical point of view,” said Rexman, who you can find on Twitter. 

Summary

 

The StoryTrading community empowers individuals to make the best-informed trade and investment decisions through a holistic view of stocks based on the four pillars of Fundamentals, Catalysts, Sentiment, and Technicals. Analyzing all four pillars together can also help identify key inflection points.

In today’s volatile markets, finding a stock that has an ideal combination of growth and value can be challenging, and yet RELL may have what it takes. 

The company’s fundamentals could be poised for performance with revenues possibly growing to north of $275 million by 2023, and the value of shares could range anywhere from $20 to $40 over the next year or so. The company also had a cash position of $40 million as of its most recent quarter and pays a quarterly cash dividend.
 

Looking at catalysts, things may soon inflect for RELL after management stated upside optionality, above and beyond the revenue guidance, will come from the green energy space. There are several deals in the pipeline, which could bode well for the company. 

Sentiment has been bullish for RELL, particularly as a green energy play, but management’s lack of charisma could be putting undue pressure on the stock. Technically, from Rexman’s perspective, RELL’s 15s breakout, is an all-time trend breakout, which can spark a long-term uptrend.

The big question is whether RELL can deliver on growth in 2022. That's for you and the rest of the market to determine. We'll be here to tell the story as events unfold!

 

Disclaimer: Author Holds LONG position on RELL