Celestica’s improving margins make it an attractive investment, says Paradigm

Celestica (TSX:CLS) is still an attractive investment because a softer than expected top line is being offset by improving margins, says Paradigm Capital analyst Gabriel Leung.

On Wednesday, Celestica reported its Q1, 2014 results. The company earned (U.S) $37.3-million on revenue of $1.312-billion, a topline that was down 4% from last year’s Q1.

CEO Craig Muhlhauser assessed the period with a pragmatic tone.

“Celestica delivered first-quarter revenue at the low end of our guidance range as end-market demand continued to be volatile, primarily within our communications business. Despite the challenges, we delivered operating results in line with our beginning-of-quarter expectations as a result of our focus on continuous improvement and disciplined cost management,” he said, adding: “We are also pleased with our operating margin improvements compared with the first quarter of 2013.”

Leung says the Q1 results were essentially in line with his expectations, with revenue a little softer than his prediction of $1.35-billion, and the street consensus of $1.37-billion. But the Paradigm analyst notes that the company’s operating margins improved to 3.1% from 2.5% in 2013. He believes this reflects improved operating efficiencies and a better and more diversified revenue mix.

In a research update to clients Thursday Leung reiterated his “Buy” rating and (U.S.)$12.50 one-year target on Celestica, implying a return of 13% based on Wednesday’s closing price of $11.08 on the NYSE.

Leung says he is encouraged by Celestica’s strong bookings going into 2014 and thinks potential catalysts such as an acquisition, a share buyback or a dividend could move the needle on the stock.