Celestica is a Buy, says Canaccord Genuity

Multinational electronics manufacturer Celestica Inc. (Celestica Stock Quote, Chart, News: TSX:CLS, NYSE:CLS) did an admirable job over its first quarter 2018 by returning to growth even as the company completed a major reorganization, says Robert Young, analyst for Canaccord Genuity. Young updated clients on Friday with a research report which maintained his “Buy” rating and $13.00 target price for Celestica (all figures in US dollars unless noted).

Toronto-based Celestica announced its fiscal Q1/18 on Friday, beating expectations on revenue and coming in line with estimates on adjusted EPS. The company produced a top line of $1.50 billion for the quarter, a 1.2 per cent increase over Q1/17 and above the consensus $1.47 billion, with an adjusted EPS of $0.24.

“Celestica’s first quarter results highlight the steady operating and financial performance being achieved in our Advanced Technology Solutions segment, as well as pressure being experienced in our more volatile Connectivity & Cloud Solutions segment,” said Rob Mionis, President and CEO, in a press release. “Despite the component constrained environment affecting our entire industry, we achieved results in line with our guidance for the first quarter, and anticipate additional revenue growth and improved operational efficiency in the second quarter of 2018.”

Young says that the company-wide restructuring to streamline its cost structure should help Celestica get past soft Q1 margins as it heads into the second half of 2018. As well, the company is sitting on a significant amount of cash, making the prospect for buybacks and acquisitions more likely.

“Celestica highlights $700 million of dry powder for continued M&A activity although we believe the focus will be on smaller capability additions in ATS like Atrenne which adds ~$80 million of high OM revenue in the A&D sector,” says Young. “As well, the company plans to continue to be active on its NCIB program through the balance of the year.”

Young says that Celestica is currently trading at an EV of 5.0x C2018E EV/EBITDA, which is at a discount to its electronics manufacturing services (EMS) peers.

“We believe the valuation discount is undeserved,” says the analyst. “Flex, Benchmark, Plexus, and Jabil, Celestica’s closest peers, trade at 6.2x, 5.2x, 9.1x, and 4.0x, respectively, on consensus estimates. Celestica trades at the lower end of its historical range. Moreover, we see little downside against tangible book value of $9.14/shr.”

The analyst has adjusted his estimates for CLS, projecting sales and EBITDA in 2018 of $6,379 million (up from $6,168 million) and $283.1 million (up from $270.0 million), respectively.

Young’s $13.00 target price represents a projected return on investment of 15.8 per cent at the time of publication.