Celestica Inc. (NYSE:CLS) is still a buy or hold that requires ongoing monitoring. In my previous write-up on Celestica, I called it a buy based on an earnings prediction methodology I’ve been experimenting with. In the case of Celestica that turned out well because it is up some 85% since. Because it has run up so much in such a short amount of time, I wanted to review whether it is still a hold.
The first table shows analyst estimates at the time of my previous article, the second table contains my estimates at that time.
Table 1:
Aggregate analysts | |
EPS Normalized Estimate | $0.68 |
EPS GAAP Estimate | $0.56 |
Revenue Estimate | $2.08B |
table: 2:
Bram de Haas | |
EPS Normalized Estimate | $0.71 |
EPS GAAP Estimate | $0.66 |
Revenue Estimate | $2.2B |
EPS actually came in at $0.86 and revenue at $2.21 billion.
My revenue estimate was quite close. EPS was off by quite a bit, but in part because the company got a break on the tax front (per its earnings call, emphasis added):
Our adjusted earnings per share for the first quarter was $0.86, which exceeded the high end of our guidance range. Our adjusted EPS was up $0.39 compared to the prior year period, driven primarily by higher non-IFRS operating earnings and a more favorable adjusted effective tax rate. Our first quarter adjusted effective tax rate expectation was 20%, assuming that global minimum tax would be enacted in Canada by March 31st. Given the legislation has not yet been enacted, our adjusted effective tax rate came in favorably at 15%, leading to a benefit of approximately $0.05 per share.
As of June 2024, this Global Minimum Tax Act is still not in effect. The way I understand it, a committee is studying it and I don’t think it is going to impact the next quarter either, yet it is being reflected in management guidance.
I won’t be including a full EPS/revenue estimate for next quarter in this article yet because it is still quite far out. Because the share price has is up a stunning 260% over the past year on a mere 9.5% revenue increase, I’m a bit worried whether this rally is sustainable:
Celestica is now a $6 billion market cap company. Forward EPS estimates have been keeping up better:
And EPS has grown impressively as well:
In Q1, the company started operations at a new Thailand facility and the Kulim site in Malaysia. The Thailand complex is being expanded and should be finished in H1 2025.
Given these expansions, the expansions underway, and the secular tailwinds the company is exposed to with its Aerospace & Defense, energy transition, and AI/datacenter related business, the fact that it trades at a 15x forward earnings multiple indicates the market is anticipating some cyclicality here. Management pointed out that it is currently experiencing some cyclical weaknesses (emphasis mine):
In our industrial business, we believe that key sub-markets, including EV charging, smart energy, on-vehicle, and factory automation will continue to be supported by favorable secular trends in our economy over the long term and will help drive robust and sustainable growth in our industrial business in the coming years. However, in the near term, the industrial business continues to experience softness across a number of our submarkets, driven in large part by EV charging as the industry works through an inventory backlog amidst a slowdown in demand for electric vehicles.
The company segments its business like this:
ATS has been holding back the overall growth rate recently and is guided to be flat for the year. CCS should grow around 20% and make up an increasingly large share of revenue. If it sustains a higher growth rate, the company growth rate should converge over time. ATS, or subsegments, could start to show healthier growth, which would accomplish the same thing.
The AI/datacenter build out is a huge tailwind for CCS and the company benefits greatly. In 2023, hyperscalers made up 62% of the CCS segment revenue. Management expects hyperscalers to make up even more of the segment revenue for 2024 and for that growth to continue.
Hyperscalers cloud computing services on an enormous scale. Other companies go to them with their AI workloads and can buy processing power on demand. I’d say there are four hyperscalers: Alphabet Inc. (GOOG, GOOGL), Amazon.com, Inc. (AMZN), Microsoft Corporation (MSFT) and Alibaba Group Holding Limited (BABA).
Management views the hyperscaler build out as a secular trend, and I’m inclined to agree with that. There is definitely a lot of hype around AI. This hype is definitely adding to the demand for AI computing power. Over time, that demand will go away. Yet, every large company, countless startups, and even sovereigns are exploring AI. The successful projects will scale up and create a consistent demand flow for computing resources. I recently reviewed the NVIDIA Corporation (NVDA) earnings call, and I was surprised by the demand from sovereign states. A source of demand I don’t see going away anytime soon.
Last quarter, 35% of revenue was apparently coming from one hyperscaler. Revenue concentration is often called out as a risk. I think that’s fair. The one caveat I have is that it is still usually revenue that’s very desirable. It is something to keep in mind about management when thinking about leverage, or as an investor when thinking about volatility.
In terms of outlook, the company is guiding towards adjusted EPS between $0.75 and $0.85 per share. The aggregate analyst estimate is $0.81. At this time, I’m not going to quibble with that too much. Except that the guidance anticipates an increased tax rate that, so far, isn’t in effect. I’m inclined to think the company will exceed it but need to look into it more closely.
I do think this is still a buy or hold. Even after the tremendous run, it has experienced over the past year. Important drivers of revenue growth are more secular than cyclical in nature. Revenue is likely to be volatile because of the nature of the business and the customer concentration risk. The company could easily overshoot or undershoot targets within a quarter based on how business gets spread out. This shows up in the volatility of the share price as well. I believe the share price bakes in some expectation of cyclicality and/or earnings growth normalizing. In the short term, it doesn’t seem too likely to happen, and it seems fine to continue to hold/buy. If there are signs of a slowdown in the growth segments of the business, that changes things.
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