Take a pass on Celestica, Beacon Securities says

A year of rebuilding lies ahead for Celestica (Celestica Stock Quote, Chart TSX, NYSE:CLS), according to Gabriel Leung, analyst for Beacon Securities, who in an update to clients on Thursday reacted to the company’s quarterly results by dropping his rating from “Buy” to “Hold” while trimming his price target from $10.50 to $9.00.

Electronic Manufacturing Services company Celestica released its first quarter fiscal 2019 financials on Wednesday, coming in with revenues of $1.43 billion and earnings per share of $0.12 per share. Management had guided for between $1.45 and $1.55 billion and between $0.12 and $0.18 per share, respectively. (All figures in US dollars.)

The results were below Leung’s forecast of $1.48 billion and $0.17 per share, respectively. The analyst noted that revenues within the company’s Advanced Technology Solutions segment, representing 40 per cent of revenues, were impacted by demand weakness in semiconductor capital equipment, costs associated with the ramping of multiple new programs within industrial and health tech and materials shortages within aerospace and defense.

Leung notes that CLS has guided for Q2 revenues and EPS to be between $1.4 and $1.5 billion and between $0.09 and $0.15 per share, respectively, which is lower than the consensus expectation of $1.6 billion and $0.22 per share.

“Clearly, 2019 is turning into a year of rebuilding for CLS as it optimizes its operations to the realities of a slower demand environment. That said, we believe there could be upside via market share gains and as the demand picture improves given the potential operating leverage within the company’s business model,” says Leung.

Leung’s $9.00 target is derived from a 13x 2019 P/E estimate and amounts to a projected return of 17 per cent at the time of publication.