Richardson Electronics trades at $10.38 per share and has stayed right on track with the overall market, gaining 12.6% over the last six months. At the same time, the S&P 500 has returned 13%.

Is there a buying opportunity in Richardson Electronics, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free for active Edge members.

Why Do We Think Richardson Electronics Will Underperform?

We're cautious about Richardson Electronics. Here are three reasons why RELL doesn't excite us and a stock we'd rather own.

1. Backlog Declines as Orders Drop

Investors interested in Specialty Equipment Distributors companies should track backlog in addition to reported revenue. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into Richardson Electronics’s future revenue streams.

Richardson Electronics’s backlog came in at $134.7 million in the latest quarter, and it averaged 2% year-on-year declines over the last two years. This performance was underwhelming and shows the company is not winning new orders. It also suggests there may be increasing competition or market saturation.

2. Breakeven Free Cash Flow Limits Reinvestment Potential

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Richardson Electronics broke even from a free cash flow perspective over the last five years, giving the company limited opportunities to return capital to shareholders.

3. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Richardson Electronics’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Final Judgment

We cheer for all companies making their customers lives easier, but in the case of Richardson Electronics, we’ll be cheering from the sidelines. That said, the stock currently trades at 58.2× forward P/E (or $10.38 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find more timely opportunities elsewhere. We’d recommend looking at the most entrenched endpoint security platform on the market.

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