2023-06-01 09:10:57 ET
Summary
- Celestica traded higher, rebounding from a post-quarterly earnings slump.
- AI lift is temporary: growth in its other core segments matter more.
- Strong Quant grades discussed.
Investors at first reacted poorly on Celestica's ( CLS ) fiscal first-quarter report. The Canadian electronic components manufacturer posted strong revenue that beat estimates . However, it missed earnings per share targets. After selling pressure ended at below $11, CLS stock rebounded back to $13. Although traders make take profits again, investors must assess the current economic environment.
Do shares trade at a big enough discount to price in the host of challenges that Celestica is navigating? Its first quarter reflects the company's strong commercial portfolio. Investors will like its recent financial performance and outlook from here.
Q1/2023 Results
Celestica posted revenue increasing by 17% to $1.84 billion . Typical of an electronics components supplier is its low operating margin of 5.2%. This improved from the 4.4% posted last year. The firm benefited from an increase in revenue in its Advanced Technology Solutions unit. Industrial, health technology, and aerospace and defense are strong sectors of the economy that lifted ATS results.
Investors should expect demand tailwinds and improved materials availability to potentially result in a guidance hike in the next quarterly report. The strong results offset the softness that Celestica faced in its capital equipment business.
Connectivity & Cloud Solution Strength
While ATS accounted for 43% of total revenue, CCS boosted quarterly performance. The strength in the two segments increases Celestica's portfolio diversification.
Revenue from CCS increased by 20% Y/Y. Materials availability allowed the company to meet demand from the enterprise and communications end markets. Expect strength in proprietary compute demand to more than offset softness in the networking segment.
Opportunity
Unlike weak firms that are saddled with debt and questionable borrowing availability, Celestica has ample liquidity. It has around $600 million in borrowing capacity under its current revolver. This gives it $900 million in liquidity. Its gross debt fell by $12 million sequentially, leaving its gross debt at $623 million. At a net debt position of $304 million, the firm has a gross debt-to-adjusted EBITDA leverage ratio of 1.3 times.
Celestica's Seeking Alpha quant scores improved on four of the five metrics:
seekingalpha premium
Growth, profitability, momentum, and revisions all improved. The unchanged valuation with an A+ suggests that the stock is still inexpensive. It needs positive catalysts ahead to unlock its valuation discount.
The near-term prospects will unfortunately not send CLS stock higher. The company anticipates continuous market weakness in capital equipment. Lower demand in network and routing will decrease its communications revenue in the mid-teens percentage Y/Y .
Guidance
Celestica expects to earn $2.00 to $2.05 in EPS. This values CLS stock at a forward P/E of only 6.37 times. Markets are unwilling to pay a premium for new program launches from the green energy projects. Furthermore, shareholders do not want to overpay for the stock despite secular tailwinds in vehicle electrification and energy storage.
Clean energy investors are closely watching the downtrend in lithium miners. The sharp drop in lithium prices from the Nov. 2022 peak through in April 2023 spooked investors. Albemarle ( ALB ) and Lithium Americas ( LAC ) are two notable firms that are trading in a sustained, year-long downtrend.
Celestica expects to outperform the broader market in 2023. However, it did not anticipate wafer fab equipment market strength to return until next year. For that to happen, it needs customers in the green energy space to accelerate their spending.
Strong Commercial Aerospace Business
Celestica is benefiting from the normalization of commercial air traffic. New programs are ramping up, which lifts its ATS segment. Again, investors should look at shares of GE ( GE ) and Boeing ( BA ) stuck in a trading range as a guide. Markets also took profits in aerospace and defense stocks like Northrop Grumman ( NOC ) and Raytheon ( RTX ).
When markets avoid investing in the airline and defense sectors, they are also cautious about buying Celestica.
Risks
CLS stock rallied recently on AI hype. Last year, Celestica posted growth of 59% in Hardware Platform Solutions . This created tougher comparable results. Still, hyper-scaler is growing in the double-digit percentage this year. The buzz in artificial and machine learning investments should give HPS a lift.
Investors should expect profit-taking in shares as the AI hype fades.
Your Takeaway
The market should eventually lose momentum from over-bidding in AI-related names. When that happens, investors will consider Celestica's revenue growth from AI and ML-related demand. They will also assess the strength of the aerospace and defense business.
The stock has a 4.32 out of 5.0 quant rating . Long-term investors may buy the stock without trying to pick a lower buy zone. Celestica has strong revenue momentum overall to justify its addition to the portfolio.
CLS Rating (seekingalpha premium)
For further details see:
Why Celestica Is A Stock To Buy