Celestica price target lowered by Paradigm, keeps “Buy” rating

Celestica’s (Celestica Stock Quote, Chart, News: TSX:CLS) higher Q3 margins were tempered by its lower-than-expected fourth quarter guidance, says Paradigm Capital analyst Gabriel Leung.

Yesterday, Celestica announced ts Q3, 2014 results. The company earned (US) $34.4-million on revenue of $1.423-billion, down 5% from last year’s Q3.

“Despite overall demand softness in the third quarter, primarily in our communications end market, we improved our adjusted operating margin and generated higher free cash flow compared to the second quarter of this year, as well as to the same period of 2013,” said CEO Craig Muhlhauser. “While we expect the overall business environment to remain challenging in the near term, we remain committed to investing for the future growth and profitability of Celestica while achieving improvements in our margins, ROIC and free cash flow.”

The company said it expects fourth quarter revenue will be in the range of $1.375-1.475 billion, and that non-IFRS adjusted net earnings per share would be in the range of 21 to 27 cents. It also announced that Muhlhauser would retire by the end of 2015.

Leung says he is pleased with Celestica’s operating margin improvements, noting that the 3.9% operating margin was a multi-year high. The analyst says this reflects loss reductions in the company’s semiconductor division, cost management efforts, and a “continued positive revenue mix shift”.

In a research update to clients this morning, Leung maintained his “Buy” rating on Celestica, but lowered his one-year target on the stock from $13.50 to $12.50, implying a return of 25% at the time of publication. The analyst says the lower target is the result of a “general industry multiple contraction” that has him lowering his EV/EBITDA multiple on Celestica from 7x to 6x.