Although they do business in different product categories and end markets, these two interesting small-cap stocks, Westell Technologies (WSTL) and Richardson Electronics (RELL), actually have a few things in common. Their corporate headquarters are located about 20 minutes apart from each other in the Chicago suburbs. They are relatively small companies with market capitalizations under $200 million. And they both have long operating histories going back over 30 years. But most importantly, they have both recently sold business units that have left them cash rich, particularly when compared with their market caps.
As of December 31, 2012, Westell had $119.2 million in cash on the balance sheet and no debt compared with its current market capitalization of $117 million. Richardson had $141.9 million in cash and short-term investments as of December 1, 2012, and no debt compared with its current market capitalization of $180 million. That means the market is valuing the total Westell business at around zero and the total Richardson business at only $38 million. Two big questions remain - is that the appropriate value for these businesses and is that much cash a good thing or a bad thing?
Westell designs and distributes wireless communication and broadband connectivity products to wireless carriers, industrial customers and utilities. This includes items such as cell site optimization products, Ethernet solutions, and fiber connectivity devices. The company was founded in 1980 and has been run by industry veteran Rick Gilbert since 2009. Richardson is a manufacturer and distributor of electronic products serving a wide range of industrial, medical and military customers. Proprietary products include items such as custom display monitors, rectifiers and power tubes. Richardson also distributes electronic components for major third-party manufacturers that are used in areas such as laser cutting, diagnostic imaging, high voltage switching and broadcast transmission. Richardson Electronics was founded in 1945 and has been run by Ed Richardson, the son of the founder, since 1989.
As we have learned from the recent Apple (AAPL) cash debate, there are not many things a company can do with high cash balances. It can do nothing and let it gather on the balance sheet; re-invest it in the company through higher operating expenses, R&D or capital expenditures; make acquisitions; or return it to shareholders. Letting it sit on the balance sheet earning .01% is probably the worst option as it greatly diminishes the overall company returns on capital and assets. Both of these companies are spending adequately on capital and R&D related expenses. Westell has been active on the acquisition front having recently bought a cell site optimization product company in May 2012, and has indicated that M&A will be a focus in order to meet its $100 million in revenue run rate goal. On March 18 of this year, Westell moved toward that goal even further by acquiring Kentrox, an Ohio-based company that specializes in cell tower site management solutions and products. The acquisition utilized $30 million of its large cash position and will add over $30 million in high margin revenues to Westell. Richardson has indicated that acquisitions are a possible use of cash but has not been active in recent years. However, during the most recent earnings conference call, the company stated with regard to acquisitions that it would "be very disappointed if we don't have something done in the next six to 12 months."
Returning it to shareholders through share buybacks is usually a worthwhile option but it all depends on the price one pays to determine if it is accretive. The track record of accretive share buybacks in corporate America has not been good. But both Richardson and Westell have been buying back shares recently at prices usually below tangible book value, which is almost always a good idea.
So is the best that can be said of cash rich, safe companies that they won't go bankrupt? While certainly true in both cases here with no outstanding debt and loads of cash, I think each has carved out some unique industry niches that will allow them to grow their businesses from the current low base they have created, even in sustained difficult economic environments. But what it all boils down to in cases like these is it becomes a management and board of directors story and how they allocate capital for the benefit of shareholders. So it certainly pays to be conservative in troubling times like we are in, yet it does nothing good for shareholders to watch your company's returns being driven down because the vast majority of your asset base is earning a return of less than 1%.
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