With this article, I will try something I’ve never done before. I will try and predict earnings for Celestica Inc. (NYSE:CLS) in the next quarter. I’ve never done this before because my roots are in value investing, where it is a maxim that everyone is focusing on next quarter’s earnings, while that’s useless in determining long-term value. There is some truth in that. With my investments, I usually try to get the big picture right, and that’s already really hard. There is so much variability quarter to quarter that the value maxim made sense to me. Best not to bother.
However, over the years, I’ve done an increasing amount of event-driven and special-situation investing. This takes many forms but can usually be distilled to an event occurring and unlocking value (or not) within a certain timeframe. Earnings are “events” that are occurring regularly and predictably. It is most likely a much more efficient playground, but if I can find ways to add value, it would smooth my returns a lot because there are so many potential “at bats.”
The first company I’m going to try and predict earnings for will be Celestica because it is an interesting and growing company that I’ve been analyzing anyway. It provides products, services, and software related to all kinds of electronic products to enterprise customers. Often its products are integrated into a larger complex product. Most notably, explaining its recent success, it has a segment called hyperscalers that provides solutions for AI data centers. Its earnings are also coming up relatively soon. By Seeking Alpha’s estimate, they’re expected around 1/25/2024.
It’s not just AI-hype that’s been driving this company, though. Revenue and earnings (especially earnings) have been expanding rapidly. The company also says and does things you love to see as an investor like share buybacks and having a firm capital allocation policy in place. Even better it features the shareholder prominently promising to return 50% of free cash flows.
Management also provides guidance around EPS and revenue growth, but it seems a bit crude. I’m also pretty sure they’re sandbagging really hard because they’re “surprising” analysts every quarter.
EPS vs consensus (Seekingalpha.com)
Likely, some of it is due to genuinely getting lucky with the AI tailwind, but still. I don’t know why analysts are letting them downplay their prospects like this. The market isn’t buying it anyway because its shares plunged -13.37% on its Q3 earnings with an EPS number that beat estimates. However, revenue was slightly under consensus and that tends to be more important for growth companies. Let’s take a closer look.
| EPS Estimate | EPS Actual | Surprise | Surprise % | |
|---|---|---|---|---|
| Mean | 0.33 | 0.36 | 0.03 | 9.03 |
| Std | 0.14 | 0.13 | 0.11 | 33.33 |
Earnings were, on average, 3% above analyst estimates. The standard deviation of the surprise is 0.13, which means that there is a wide range of surprise values. The largest surprise was in September 2020, when earnings were 28.74% above analyst estimates. The smallest surprise was in December 2019, when earnings were 3.26% above analyst estimates.
Revenue is perhaps more important and this came in an average of 3.86% above the mean of analyst estimates.
| Revenue Estimate | Revenue Actual | Surprise | Surprise % | |
|---|---|---|---|---|
| Mean | $1.56B | 1.62B | $60.44M | 3.86% |
| Std | $0.24B | $0.26B | $63.44M | 4.21% |
Analysts have recently been raising their estimates and targets. I like this Benzinga overview:
Analyst estimates (Benzinga)
Seeking Alpha has put together an overview of analyst estimates which aggregate down to:
| Aggregate analysts | |
| EPS Normalized Estimate | $0.68 |
| EPS GAAP Estimate | $0.56 |
| Revenue Estimate | $2.08B |
Keep in mind I did this for the first time, so take this with a grain of salt, but here are my estimates:
| Bram de Haas | |
| EPS Normalized Estimate | $0.71 |
| EPS GAAP Estimate | $0.66 |
| Revenue Estimate | $2.2B |
I’ve gotten to the above by performing time series analysis on revenues and EPS, while also doing time-series analysis on analyst estimates. I put together a simple model with a few other factors and weighted the values. One thing to keep in mind is that the company also has a share buyback program that lets them buy back a lot of stock. This helps management in that it makes it a lot easier to hit EPS numbers by tactically buying back shares. The share count has been shrinking over recent years, which contributed to the relatively strong EPS growth.
My conclusion is that the company is likely to beat EPS and revenue. As far as I know, the economy has likely not slowed down enough to derail the final quarter of 2023 for this company. However, this is likely expected to an extent given the company’s tendency to “surprise” positively.
I’m inclined to believe beats on both EPS and revenue will still lead to a positive share price reaction when earnings are announced. However, if Celestica Inc. stock has a strong run into earnings or suddenly the outlook deteriorates, the Q4 earnings alone won’t keep the share price afloat. Based on this first attempt at earnings estimates, I think Celestica Inc. stock is a buy/hold into this event.
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