This week Richardson Electronics (RELL) announced the closing of the sale of its RF, Wireless and Power Division (RFPD) to Arrow Electronics (ARW) for $238.8 million in cash. The closing of this deal marks the end of the 5 month transaction process and leaves RELL with a pile of cash.
According to the Q2 FY2011 conference call on January 6th, the company will put about $210 million of the $238 million to the balance sheet after taxes and expenses. That brings the company’s total cash position to about $225 million, give or take a few million in working capital fluctuation. This gives the company $12.50 in cash per share and an enterprise value of about $10 million.
On the conference call the company left all options for this cash on the table. Edward Richardson, the company’s CEO, said a buyback, dividend and small “bolt on” acquisitions were all likely.
So what is left at RELL? The company has two business lines: Canvys and Electron Device Group (EDG). Canvys engineers and sells advanced visual technology to the healthcare, advertising, transportation and military industries. These devices include imaging display work stations, touch screens, rack mount displays, etc. EDG distributes and manufactures high-power, high-frequency electronic components and sub-assemblies for many markets, including Semiconductor Equipment, Laser, Medical, Marine, Avionics, Microwave & RF Industrial Heating, Radio & TV Broadcasting, Radar and Communication.
These two businesses grew about 20% yoy in the last quarter. Canvys was down slightly yoy due to a large, non-recurring, order in the same quarter of the previous year. EDG grew about 42.4% related to a stronger market for the company’s products along with a new, major distribution agreement. Going forward the company expects these businesses to grow 10-15% yoy to 38mil-40mil next quarter.
On the conference call Kathleen Dvorak, the company’s CFO, said that after the company completes its post-transaction restructuring, operating margins of 5% are expected in FY2012 (starting in Q3 CY2011). Using the analyst estimates for $168 million in revenue for FY2012 this gets EPS $0.47 accorded to the CFOs guidance.
Applying a conservative multiple of 12x this makes the business worth about $5.64. Ex-cash the market’s valuation of RELL is about $0.50. Based on these simple calculations the company is clearly very undervalued. With shares of the company trading nearly at cash, I would expect the company to devote a large amount of the cash to a buyback of shares. This would return value to shareholders while also helping to align the EPS with the stock price by reducing the float. I also expect to see some sort of dividend increase but I expect a special, one time dividend is unlikely.
RELL is a true value stock. Investors are soon to be backed up by a massive share repurchase program by the company and will be rewarded for buying the value in this company now.