Investing In Green Energy And PMT Will Simplify Operations

Key Takeaways

• Strategic focus on Green Energy Solutions and divestiture of Healthcare unit aims to improve simplification and net margins.
  
• Growth in Power & Microwave Technologies and U.S. market expansion, aided by Made in America policies, could increase revenue.
  
• Economic uncertainties, tariff changes, and divestitures negatively affect Richardson Electronics' revenue, margins, and market share amid volatile demand in key segments.

Catalysts

Engages in the provision of engineered solutions, power grid and microwave tube, and related consumables worldwide.

• The strategic divestiture of the Healthcare business unit to focus on core segments and reinvest proceeds into growth initiatives, particularly Green Energy Solutions, is expected to simplify operations and improve long-term financial performance, potentially increasing net margins.
  
• Strong growth prospects in the Power & Microwave Technologies (PMT) and Green Energy Solutions (GES) segments, combined with a robust backlog and strategic partnerships, could drive significant revenue and earnings growth in the coming years.
  
• The ability to capitalize on new Made in America policies, leveraging their strong infrastructure and supply chain adaptability, positions Richardson Electronics to potentially increase market share and revenue in key U.S. markets.
  
• The company is investing in innovation and expanding its engineering and manufacturing capabilities, which could result in enhanced product offerings and improved operating efficiencies, thus positively impacting net margins.
  
• Plans to pursue strategic acquisitions in FY '26, following their M&A strategy, could enhance capabilities, diversify revenue streams, and contribute to earnings growth.

Richardson Electronics Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Richardson Electronics's revenue will grow by 8.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from -1.1% today to 5.6% in 3 years time.
• Analysts expect earnings to reach $14.3 million (and earnings per share of $1.01) by about April 2028, up from $-2.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.5x on those 2028 earnings, up from -52.1x today. This future PE is lower than the current PE for the US Electronic industry at 19.3x.
• Analysts expect the number of shares outstanding to grow by 0.93% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.31%, as per the Simply Wall St company report.

Richardson Electronics Future Earnings Per Share Growth

Risks

• The divestiture of Healthcare assets resulted in a $4.9 million loss on disposal, and the continued production of ALTA tubes is expected to generate a loss until the end of FY '26, which will negatively impact the company's overall net margins and earnings.
  
• A $2.2 million decline in GES sales due to fluctuations in project-based sales, particularly in wind turbine battery modules, poses a risk to consistent revenue generation in this segment.
  
• Changes in tariffs, particularly those involving China, could increase costs and impact supply chain efficiency, potentially affecting both revenue and net margins as adjustments are made to sourcing and logistics.
  
• The company's exposure to semiconductor and wafer fab markets, while currently strong, is subject to fluctuations and uncertainties in demand, leading to potential variance in revenue growth and profitability.
  
• The high degree of near-term economic uncertainty and risks associated with new market tariffs could affect the company's ability to sustain profit margins and capture market share, impacting overall net profits.

Valuation

• The analysts have a consensus price target of $9.5 for Richardson Electronics based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $257.6 million, earnings will come to $14.3 million, and it would be trading on a PE ratio of 11.5x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $8.45, the analyst price target of $9.5 is 11.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.