Celestica is undervalued, says Canaccord Genuity

Canaccord Genuity analyst Robert Young says that despite an improving electronics manufacturing services sector, Celestica (Celestica Stock Quote, Chart, News: TSX, NYSE:CLS) still isn’t getting the love it deserves.

Shares of Celestica spiked late in January after the company announced fourth quarter 2016 revenue was (US) $1.62-billion, ahead of the company’s guidance range of $1.5 to $1.6-billion.

“Celestica delivered a strong fourth quarter, with growth in revenue of 7 per cent and growth in operating earnings of 16 per cent, compared with the fourth quarter of 2015,” said CEO Rob Mionis. “Celestica’s strong close to the year helped deliver full-year 2016 revenue growth of 7 per cent, 14-per-cent growth in operating earnings and over $100-million of free cash flow. Among the many highlights for 2016, we achieved our highest level of operating margins since 2001 and the highest revenue levels since 2012. We are proud of our many accomplishments this year. I am pleased with the progress we have made in setting the foundation for our strategy and delivering on our priorities, and I am excited about the momentum we are building as we continue to drive profitable growth and increase shareholder value.”

Young says Celestica is looking cheap compared to its peers, and thinks there is growth on the horizon for the company.

“The EMS neighborhood appears to be improving but despite strong quarterly performance, Celestica continues to trail its peers on valuation,” explains the analyst. “We believe that Celestica is at the beginning of a more aggressive phase of growth buoyed by an under-levered balance sheet which may be put to work on M&A as early as late 2017. We feel that the risk related to Celestica’s 70% mix of revenue from legacy businesses (collectively communications, server and storage) is lower than perceived given exposure to current optical trends and strength of Celestica’s differentiated JDM offering. Stronger double-digit growth is expected from the diversified segment, supplemented by acquisitions, but temporarily impeded by a 3% solar headwind, driving our outlook for 4-5% overall annual growth moving forward. In our view, there is potential for margin uplift from an increased mix of sticky, high-margin diversified business and as Celestica’s existing diversified footprint stabilizes. On the back of recent marketing meetings in the US Midwest, we have renewed confidence in this new phase of growth.

In a research update to clients Monday, Young maintained his “Buy” rating on Celestica, but raised his one-year price target from (US) $14.25 to $16.25, implying a return of 16.9 per cent at the time of publication.

Young thinks Celestica will post EBITDA of (US) $304.5-million on sales of $6.25-billion in fiscal 2017. He expects these numbers will improve to EBITDA of $311.9-million on a topline of $6.54-billion the following year.