Celestica could surprise you in 2019, says Beacon Securities

Investors may have reacted strongly to the latest quarterly report from Canadian tech company Celestica (Celestica Stock Quote, Chart TSX, NYSE:CLS) but Gabriel Leung of Beacon Securities says the company could still surprise in 2019.

Shares of electronics manufacturing services firm Celestica dropped sharply last week as the market responded to its fourth quarter and full year earnings for the period ended December 31, 2018. The company reported Q4 revenue of $1.73 billion, a ten per cent increase year-over-year, and EPS of $0.29 per share. The consensus average was $1.73 billion and $0.31 per share. (All figures in US dollars.)

“Celestica delivered on its Q4 consolidated non-IFRS operating margin target of 3.5 per cent, driven by strong performance in our CCS segment and our aerospace and defence business,” said Rob Mionis, President and CEO, in a press release. “We were particularly pleased that we achieved this key margin metric despite the impact of slower cyclical demand from our capital equipment customers, which had an adverse impact on ATS segment margin for the quarter. Although we remain positive about our positioning and the long-term growth prospects of the capital equipment business, we will focus our efficiency initiatives during the first quarter of 2019 on improving margins and better aligning this business to the current revenue environment.”

Leung notes that Celestica’s Q4 ATS operating margins were 3.7 per cent, which came in below management’s target range of five to six per cent and was driven by weaker-than-expected demand in capital equipment, specifically in the semi-conductor market. For guidance, CLS is calling for Q1 revenues and adjusted EPS of $1.45 to $1.55 billion and $0.12 to $0.18 per share, respectively, notes Leung, who points to the consensus projection of $1.54 billion and $0.27 per share, respectively.

“Overall, we believe 2019 could be an interesting year as CLS’ cost initiatives play out, which could result in margin upside surprises,” says Leung, in a client update Monday.

The analyst is calling for 2019 revenue of $6.43 billion and adjusted EPS of $0.95 per share. Leung’s rating remains a “Buy” but he has reduced his one-year target price from US$13.00 to US$10.50, which represents a projected return of 30 per cent at the time of publication.