2023-11-16 13:11:10 ET
Summary
- Celestica has produced strong Q3 numbers and expects 20%+ EPS growth in 2023, with potential for continued growth in 2024.
- The company operates in the electronics manufacturing services industry and offers a range of solutions for various industries.
- Celestica aims to return cash to shareholders through a buyback program and has a strong history of reducing the share count.
Celestica ( CLS ) produced very strong Q3 numbers a couple of weeks ago, yet the stock fell due to revenue guidance. However, the stock has rebounded and is looking to make new highs. Celestica has grown shareholder value and is expecting to see 20%+ EPS growth in 2023. I fully expect the strong EPS growth to continue in 2024, and I'm hopeful that we see them return more cash to shareholders in the form of buybacks. The stock has been on one heck of a run, returning over 150% in the last 6-months, but it looks set to set new highs in the coming days. I am bullish on Celestica over the next year.
What's Driving Celestica?
For those who aren't aware, Celestica is a Canadian multinational electronics manufacturing services ((EMS)) company. They provide a range of design, manufacturing, and supply chain solutions for a variety of industries. Some of these include aerospace and defense, communications, healthcare, industrial, and capital equipment. Operating on a global scale, they offer services such as design and engineering, manufacturing, assembly, testing, supply chain management, and after-market services. They cover the entire product lifecycle.
The company operates and reports based on two segments.
Advanced Technology Solutions ((ATS))
2022 Numbers : Revenue - $3.0 Billion, Income - $141 million, Margin - 4.7%
2023 Q3: Solid double-digit year-over-year revenue growth, driven by new program ramps and aerospace demand.
Connectivity & Cloud Solutions ((CCS))
2022 Numbers: Revenue - $4.3 Billion, Income - $217 million, Margin - 5.1%
2023 Q3: Benefited from improved business mix, highest-ever segment margin (6.2%).
The balance sheet sits in a strong position. With current debt sitting at $613 million, with cash on hand of $353 million, that takes net debt down to $260. Q3 gross debt to non-IFRS trailing 12-month adjusted EBITDA leverage ratio was 1.1 turns, down 0.1 turns sequentially, and down 0.4 turns compared to the same quarter of last year. One thing to keep an eye on as the company continues to grow is CapEx. While the balance sheet is in great shape right now, if the company over-extends itself it would impact shareholders and the buyback program.
Celestica aims to continue to return cash to shareholders. No, they do not have a dividend, but they do have a buyback program that they are committed to. Looking below, you can see that they do have a strong history of reducing the share count. While many might prefer a dividend, this is a great way of increasing shareholder value. They are targeting $100 million+ of non-IFRS Adjusted Free Cash Flow. From that, 50% would be returned to shareholders, and 50% would be reinvested into the business . They do add "On average, over the long term". Read into that as you wish, but at the end of the day, the commitment is there. There were not any shares repurchased in Q3, but...
...we intend to continue to be opportunistic on share repurchases under our current NCIB for the remainder of the year and intend on renewing our NCIB program in December, subject to necessary approvals...
So how does the company look with respect to non-IFRS Adjusted Free Cash Flow? In Q3, we saw them post $34 million. Year-over-year that is an increase of $27 million. That takes the year-to-date total to $110 million. Due to this strong performance, they increased their expectation to $150 million for the full year. It will be interesting to see what the buyback situation looks like at the end of Q4. Investors could get frustrated if they post anything close to $150 million and don't issue any more buybacks. Although, I would bet the recent surge in share price has played a role in that.
Earlier this year, we saw Celestica put out a long-range forecast regarding Non-IFRS Adjusted EPS. As mentioned concerning the CapEx, they are in their growth and stability stage now. Because of that, the expectations rise. Since then, they have had a really strong year.
EPS is now expected to land around $2.36. With that, they are expecting to see 10% annual growth long-term. They are on pace to do more than double that in 2023. Will 2024 hold a similar fate? I think so. I would expect 15-20% again next year. The main drivers behind this will be higher revenue across end markets and solid non-IFRS operating margins. The stock fell after Q3 earnings because of weaker-than-expected revenue targets, but just days later, the stock is reaching new highs. As long as the growth rates continue to impress, we should continue to see gains.
What Are The Risks?
This is a very volatile stock, and it responds very strongly to earnings news. This can work both for and against shareholders. Please be cautious if you are choosing to invest in Celestica.
Being the global company that it is, there are all kinds of global risks from politics, foreign currency, global supply chain, etc. A lot of these risks come out of thin air and can cause major disturbances for global operations.
They operate in an extremely competitive industry. Staying competitive often takes serious cash flow. As I mentioned earlier, pay attention to CapEx. If we start to see spikes and decreasing cash flow & revenue it could be a sign they are losing market share.
What Does The Price Say?
What can we expect about price action in the near future? For that, I look to technical analysis. The stock has been on a wild ride as of late. Returning over 150% since May 1st, it begs the question: What's left in the tank?
As the stock has risen quickly, we have seen some pretty large swings in price action. It's not really new to the stock though. It has always been volatile, it's just now moving more in terms of dollars. The problem with that is placing stops that make sense. Looking below, you can see what I mean. If you wanted to get really tight, you could place the stop at $24.30, but that is only about 10% from current levels. The other option is $22.15, which is 19% from current levels. How I would tackle this is a 50% stop at $24.30, and let the rest ride down to $22.15. This allowed for you to protect capital, while still having a normal-sized position to capture the potential upside.
The 2nd line of defense is the 50-day moving average. Looking below, you can see that it has been a strong point of support and resistance. Even with the big earnings drop recently, we saw the stock react quickly and recover above the moving average. It currently sits at about $24.25, which gives you great secondary support at the first stop.
As for the upside, you may think we are nearing all-time highs. But, the stock fell victim to the dot-com bubble in the early 2000s. The current all-time high mark is about $122.00 per share. In other words, we have a long way to go. But that's not to say we're at a significant spot. Celestica showed up on my radar for reaching a new high in the last 55 days. Typically this is a sign of a breakout. The previous high was $27.27 (on a closing basis). On Wednesday we closed at $27.22, but spiked as high as $27.99 earlier in the day.
What you want to see on a breakout to new highs, is volume surging with the move. While the volume isn't quite what it was on the big earnings day (which is expected), we do see an uptick in volume as the stock flirts with highs. Keep an eye on the volume should we see a breakthrough as that will help indicate the short-term future of the stock.
In summary, if we see the break out I would be a buyer. With strong fundamentals, there is potential here. Make sure you have a stop in place, buckle up, and enjoy the ride.
Wrap Up
As you can see, there is a lot to like about what is going on at Celestica. The stock has had one heck of a run over the last 6-months. Will it continue? I think so. Do I expect another 150% in the next 6 months? No. But I do expect the company to continue to produce strong results which leads to increased shareholder value. I hope to see them get back on the buyback train to help return some cash to shareholders. Keep an eye on revenue and CapEx, and watch for new highs. I am giving this a buy rating as I believe the stock will make new highs and continue to impress over the next year.
For further details see:
Riding The Celestica Wave: Q3 Earnings, Buyback Plans, And Future Forecasts