Despite Lawsuit, RIM Woes, Celestica Making Doubters Pay

Last summer we noticed that, despite earnings and revenue growth, the street was not buying what Celestica (TSX:CLS) was selling.

The short position on the stock was enormous, second only to Manulife Financial on the entire exchange, growing to 38.2 million shares by May 31st of last year.

More than a half-year later, Celestica has delivered solid growth. Fiscal 2011’s revenue was $7.2-billion, up 11% from prior year, and the company’s earnings, long a source of consternation in Celestica’s notoriously low-margin manufacturing business, were up too; adjusted net EPS (non-IFRS) was $1.11 per share in 2011, up 29% from 2010.

CEO Craig Mulhauser, a former exec with Ford and GE who joined Celestica in May 2005, says he has worked hard to make the Toronto-based company competitive in higher margin businesses, transitioning it from contract manufacturing to what he says will ultimately be a supply chain solutions company.

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Mulhauser underscored his belief in the plan last week when the company announced it was commencing a share buyback of of up to 16.2 million subordinate voting shares, or approximately 10% of the public float of the subordinate voting shares. The performance of Celestica’s stock, meanwhile, has begun to punish those who have held short positions, moving from $7.38 on December 15th to $8.97 yesterday.

Faced with improved numbers, are those who were betting against Celestica’s success now covering and moving on to an easier target? Not exactly. Short interest on Celestica is still high, at 36.6 million shares. And the number actually grew from mid-January to the end of that month by 443,509 shares.

So what is driving the negative sentiment on Celestica? For many it may be the shadow of a five year old shareholder suit that has life once again. Late in 2011, The U.S. Court of Appeals in New York reversed a lower court’s dismissal of a fraud lawsuit that alleges former Celestica CEO, Stephen Delaney, and former CFO, Anthony Puppi, knowingly misstated the costs of a restructuring.

Law firm Siskinds LLC is acting as counsel in the class-action suit, which claims damages in the amount of $320 million.

Another reason may be Research in Motion. In the National Post recently, Celestica conceded that “one unnamed customer of its consumer unit whose flagging demand had been “well chronicled in the press” and had hurt its numbers, “…but not more than initially forecast.”

Traditionally, About 20% of Celestica’s business has come from Research in Motion.

At press time, shares of Celestica on the TSX were down .1% to $8.96.

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