Interesting write-up. Have you considered their moat in all of the segments it operates in? The most important thing I want to know when investing in this kind of company, is whether their products are easily replicated or not.
Thank you for reading and yes that is a great question. I try to distill these single stock posts to a digestible 10-15 minutes but a section on moats should have been included. My thought below.
For the size of company that RELL is I do think there are some relatively strong moats. The first thing to consider is RELL operates across a lot of markets and provides unique/specialized components for customers - there is diversification and specialization in the business (its not just one commoditized product). Broadly speaking across segments I think there are 2 factors that help prevent new competition.
1) Sounds corny but RELL is truly more than just a "supplier" for many customers, but a true partner. RELL makes bespoke components and products (sometimes even one-offs) for customers such as the specialized displays for Medtronic's robotic laser guided surgery system. RELL has a strong relationship with customers and the company almost serves as an outsourced engineering/R&D provider. This level of familiarly and closely working with customers creates a degree of stickiness.
2) RELL operates in the "Goldilocks zone" in many of its markets. Meaning the market is big enough to be meaningful for RELL but too small for large players to be motivated to enter the market. When you consider the specialized markets that RELL operates in this further deters large competitors from spending the CAPEX and R&D to capture a relatively small market.
Some notes on RELL's most meaningful segments below:
PMT: This is mostly the legacy tubes business which are sold to a number of end markets. RELL is by far the largest commercial provider of tubes. Threat of new entrants is low bc tubes are somewhat considered an antiquated technology and are notoriously tricky to develop (CEO Ed Richardson going as far as saying "there's a lot of black magic in tubes" last earnings call).
GES: RELL has patents on the ULTRA part of this business which protects against smaller competition. Furthermore, you need customized technology for the ultracapacitor to communicate with each manufacture's turbine, which requires some degree of partnership with turbine manufactures (like RELL has with GE as the "exclusive pitch energy module for the GE marketplace" and they have with Siemens in working to develop a private label solution). The EV locomotive opportunity with Progress Rail seems secure bc the two businesses have been working closely together on the project (reiterating the first factor discussed above).
1. The company has not generated any significant cash in recent years even though revenue and profits increased.
Working capital has been sucking every last dollar and in recent conf calls taking on debt was contemplated. This may be a higher cap intensity co than you think.
2. It has dual share struct that pose risk to non controlling shareholders
3. Management quality is low and the company has been disappointing for years. The GES segment looks more like luck than skill and its advantage for the longer term is unclear.
I would still agree with the conclusion that it is a buy currently but there are probably better long term buys here.
Thank you for commenting and I agree, these are all valid considerations/points. Some thoughts on each for others that want to follow along:
1. I love cash generation but think it is understandable that the growth in GES has demanded investments in working capital and CAPEX to meet new demand (this new business went from $0 to $50 million in a few years, a material inflection for a company RELL's size). Hopefully more cash generation is on the horizon with inventory clearing up and the factory expansion complete.
2. I agree, huge consideration for any would be investor and why I call it out specifically in the post.
3. Yes, admittedly not the highest quality management team but I do think the "second team" (Greg, Wendy, Jens) are better than they get credit for. As far as luck goes any company this size needs a little serendipity, and so far RELL has capitalized on the GES opportunities in ULTRA and appears to be making good progress with Progress Rail.
You are right, RELL is a lower quality business than I would usually be interested in but for me the risk/reward at this price is attractive. Even if RELL totally drops the ball (GES is a disappointment and Healthcare never hits breakeven) I still think the rebound in the semi division alone makes this an ok investment. That said, I think there is a non-insignificant probability that GES keeps growing and healthcare breaks even - which would create lots of value.
Love for you to check out my first writeup on WINA, a company I consider to be a much higher quality business (although getting slightly expensive now). Thanks again for reading and commenting!
Interesting write-up. Have you considered their moat in all of the segments it operates in? The most important thing I want to know when investing in this kind of company, is whether their products are easily replicated or not.
Thank you for reading and yes that is a great question. I try to distill these single stock posts to a digestible 10-15 minutes but a section on moats should have been included. My thought below.
For the size of company that RELL is I do think there are some relatively strong moats. The first thing to consider is RELL operates across a lot of markets and provides unique/specialized components for customers - there is diversification and specialization in the business (its not just one commoditized product). Broadly speaking across segments I think there are 2 factors that help prevent new competition.
1) Sounds corny but RELL is truly more than just a "supplier" for many customers, but a true partner. RELL makes bespoke components and products (sometimes even one-offs) for customers such as the specialized displays for Medtronic's robotic laser guided surgery system. RELL has a strong relationship with customers and the company almost serves as an outsourced engineering/R&D provider. This level of familiarly and closely working with customers creates a degree of stickiness.
2) RELL operates in the "Goldilocks zone" in many of its markets. Meaning the market is big enough to be meaningful for RELL but too small for large players to be motivated to enter the market. When you consider the specialized markets that RELL operates in this further deters large competitors from spending the CAPEX and R&D to capture a relatively small market.
Some notes on RELL's most meaningful segments below:
PMT: This is mostly the legacy tubes business which are sold to a number of end markets. RELL is by far the largest commercial provider of tubes. Threat of new entrants is low bc tubes are somewhat considered an antiquated technology and are notoriously tricky to develop (CEO Ed Richardson going as far as saying "there's a lot of black magic in tubes" last earnings call).
GES: RELL has patents on the ULTRA part of this business which protects against smaller competition. Furthermore, you need customized technology for the ultracapacitor to communicate with each manufacture's turbine, which requires some degree of partnership with turbine manufactures (like RELL has with GE as the "exclusive pitch energy module for the GE marketplace" and they have with Siemens in working to develop a private label solution). The EV locomotive opportunity with Progress Rail seems secure bc the two businesses have been working closely together on the project (reiterating the first factor discussed above).
A few things that may be of importance:
1. The company has not generated any significant cash in recent years even though revenue and profits increased.
Working capital has been sucking every last dollar and in recent conf calls taking on debt was contemplated. This may be a higher cap intensity co than you think.
2. It has dual share struct that pose risk to non controlling shareholders
3. Management quality is low and the company has been disappointing for years. The GES segment looks more like luck than skill and its advantage for the longer term is unclear.
I would still agree with the conclusion that it is a buy currently but there are probably better long term buys here.
Thank you for commenting and I agree, these are all valid considerations/points. Some thoughts on each for others that want to follow along:
1. I love cash generation but think it is understandable that the growth in GES has demanded investments in working capital and CAPEX to meet new demand (this new business went from $0 to $50 million in a few years, a material inflection for a company RELL's size). Hopefully more cash generation is on the horizon with inventory clearing up and the factory expansion complete.
2. I agree, huge consideration for any would be investor and why I call it out specifically in the post.
3. Yes, admittedly not the highest quality management team but I do think the "second team" (Greg, Wendy, Jens) are better than they get credit for. As far as luck goes any company this size needs a little serendipity, and so far RELL has capitalized on the GES opportunities in ULTRA and appears to be making good progress with Progress Rail.
You are right, RELL is a lower quality business than I would usually be interested in but for me the risk/reward at this price is attractive. Even if RELL totally drops the ball (GES is a disappointment and Healthcare never hits breakeven) I still think the rebound in the semi division alone makes this an ok investment. That said, I think there is a non-insignificant probability that GES keeps growing and healthcare breaks even - which would create lots of value.
Love for you to check out my first writeup on WINA, a company I consider to be a much higher quality business (although getting slightly expensive now). Thanks again for reading and commenting!
Great and thorough write-up. I also appreciate the optics of explaining that you are focusing on quality of posts rather than quantity of posts.