2023-10-06 11:34:32 ET
Summary
- Celestica's stock is trading at a 52-week high and has a strong buy quant rating from Seeking Alpha.
- The company recently announced that its controlling shareholder, Onex, intended to sell shares, yet the stock price did not fall.
- Celestica's Q2 results showed revenue growth in all divisions, with the ATS segment performing particularly well.
- Upcoming Q3/23 report is a potential catalyst.
When I picked Celestica (CLS) as a top pick in 2023, the investment idea returned 134% . Readers who bought the stock in June still earned 102.6% . The strong buy rating aligns with that of the Seeking Alpha Quant Rating history . On the quant scale, it is ranked first out of 19 in the industry, first out of 582 in the sector, and third out of 4,658 overall.
CLS stock is traded at a 52-week high at the time of writing. Before diving into the currently justified valuation, where it scores an A-, does the bullish thesis on this multinational supply chain electronics manufacturing services company still apply?
Recent Celestica News
Celestica announced on Aug. 1, 2023, that its controlling shareholder Onex ( ONEX:CA ) intended to sell 6.7 million of its shares . A sale of that size usually sends the stock price lower. Celestica did not sell any shares and did not receive any proceeds from the offering. CLS stock traded at between $20 to $22 in August. More recently, shares broke out on strong volume and on no news .
Before that, RBC Capital upgraded the stock. It increased its price target ("PT") from $14 to $22 . Again, the analyst upgrade is a non-event. Analysts are often late issuing "sell" warnings after a stock drops. They also upgrade a stock after it has risen in value.
Q2/2023 Results
In the second quarter, Celestica posted revenue growing by 12.8% Y/Y to $1.94 billion . The results encouraged investors and the company. The increase in every line item gave shareholders no reason to sell shares:
The ATS end market consists of Aerospace & Defense, Industrial, HealthTech, and Capital Equipment businesses. Revenue from this division grew by 24% Y/Y. The CCS segment consists of Communications and Enterprise end markets. It rose by a modest 5% Y/Y.
Investors who follow other communications firms may appreciate the small but meaningful growth. Cambium Networks ( CMBM ) is a network firm I rated as a buy. It lost 78% in value . Fearful investors dumped CMBM stock after Cambium issued preliminary revenue of as low as $40 million . The firm previously expected revenue as high as $70 million. Cambium blamed a delay in government defense orders related to U.S. federal budgetary timing issues.
Cisco Systems ( CSCO ) pulled back from its $58.19 high. This has less to do with its results and more to do with its massive $28 billion deal to acquire Splunk (SPLK).
Outlook
In Q3, Celestica expects to report a non-IFRS operating margin of 5.6%. It will earn between 56 cents and 62 cents a share. ATS will grow in the low double-digit percentage Y/Y. Communications revenue will fall in the high single-digits. Enterprise, consisting of servers and storage, will increase in the low double digits.
Readers may speculate that Enterprise is loosely connected to the sizable increase in interest in artificial intelligence. Still, supercomputer supplier Super Micro Computer ( SMCI ) has been range-bound since July. Server suppliers like Dell ( DELL ) is pulling back while HP Inc. ( HPQ ) trades at just 9% above its 52-week low. HPQ stock pays a dividend that yields 4.29%. Shareholders copied Warren Buffett when Berkshire Hathaway continued cutting its position in HP .
The firm issued a 2023 outlook of revenue of at least $7.85 billion. This is up from its previous outlook of $7.6 billion. Non-IFRS operating margin is at the top end of its previous range at 5.5%.
Celestica's full-year earnings per share is around 10% above its previous outlook at $2.25.
Catalysts
Celestica has revenue growth catalysts in the ATS segment. Revenue grew in Q2, helped by a strong industrial business. Customer demand in commercial aerospace returned. This offset demand softness in Celestica's capital equipment business. The ATS segment accounted for 45% of Celestica's revenue in Q2.
The strength of ATS runs counter to many aerospace and defense firms. For example, Boeing ( BA ) fell nearly every day since Aug. 31, 2023, when it traded at $230.20. BA stock closed at $186.29 on Oct. 5. Defence contractor RTX ( RTX ) fell below $70 for the first time since early 2021. Markets are punishing RTX for its jet-engine recall on Sept. 11, 2023 .
On its conference call, Celestica said that its industry business growth that started in the first half (H1) will continue in the second half of this year . Long-term investors will appreciate its long-term positive outlook. The firm believes that it has several structural tailwinds that will support demand. This includes green energy, EV charging, and on-vehicle projects.
Solar energy investors will notice that CLS traded higher while First Solar ( FSLR ) lost nearly 25% of its value in the quarter. Clean energy utility firms like NextEra Energy ( NEE ) lost 31% in the quarter and is down 41% YTD. NextEra Energy Partners ( NEP ) lost half its value when it slashed its growth outlook .
Again, readers may speculate that clean energy investors are starting positions in CLS stock, lifting its share price.
In the EV charging space, CLS is performing relatively better. Blink Charging ( BLNK ) has a 30.43% short interest against it. Shares dropped by 71% YTD. Automotive firms are choosing to use Tesla's ( TSLA ) charging stations. By supplying the tools and support for the EV charging business, Celestica will thrive.
In the wafer fab equipment market, Celestica expects a return to growth in 2024. The firm closed several new programs. This included a new lithography customer. Conversely, ASML Holding NV ( ASML ) shares peaked at $771.98 and closed 24.65% below that.
Valuation
Celestica's valuation grade did not weaken as shares rose. The stock is still trading at a relative value that is up to 85% below the sector median, as the price-to-sales value of 0.38 times indicates:
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Risks
Celestica has $618 in gross debt and a net debt position of $257 million. However, it has $1 billion in liquidity from its credit revolver and $361 million in cash. In general, investors should avoid firms with high debt as interest rates remain high for longer.
You will notice media firms like Warner Bros. Discovery ( WBD ) now trading below $10.00. Paramount ( PARA ) is also trading at a 52-week low. In the telecom sector, Verizon ( VZ ) is barely above its 52-week low. BCE (BCE), Rogers (RCI), and Telus ( TU ) are Canadian telecoms that are also stocks that recently traded at multi-year lows.
Your Takeaway
Seeking Alpha Premium reasons will soon notice that Celestica is a top quant-scored stock. The company will post Q3/2023 results on Oct. 26, 2023. If the business momentum in Q2 continues, expect Celestica to report strong results and raise its guidance.
For further details see:
Celestica: Still Bullish After Strong Upside