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Is Celestica Inc.’s Dual-Class Share Structure Validated by the Market?

Many companies have dual-class share structures. Some of the most high-profile initial public offerings (IPOs) of late have incorporated dual-class share structures, such as Aritzia Inc.Canada Goose Holdings Inc., and Freshii Inc.

I will discuss Celestica Inc.  (TSX:CLS)(NYSE:CLS) and how the company’s dual-class share structure and private equity ownership have impacted the company over time.

As I’ve written about previously in another article, dual-class share structures don’t necessarily indicate a problem with the management of a firm; however, such a structure does provide strong incentives that support the long-term indoctrination of management teams. If the management team does well, investors have nothing to worry about; if, however, the management team in place provides investors with inadequate returns over a long period of time, investors can do little about it.

Celestica’s history

Celestica was originally a division of International Business Machines Corp., based out of Toronto, Ontario. The company started out as a provider of metal boxes for IBM’s mainframe computers, later providing parts for IBM’s burgeoning minicomputers segment, including circuit boards, memory, and power supplies for various models of computers over the years.

Today, Celestica provides end-to-end product solutions for a wide range of electrical systems for aerospace, defence, and other sectors. Operating globally, Celestica has boasted growing profits on the turnaround stemming from a private equity buyout and subsequent IPO during the Dot-Com bubble by Onex Corporation.

Celestica today

Celestica, by all accounts, seems to be chugging along, with earnings coming in higher than expected this past quarter, and management expecting increased returns in the coming quarters, despite the business spinning off its solar panel division in the fourth quarter of last year.

Celestica has a growing segment of renewable energy products, which still comprises a small portion of the company’s overall sales, but is notable. The majority of the revenues the company sees from its diversified segment comes from aerospace, and the company appears to be in good shape to benefit from a rebound in this industry should industry fundamentals remain robust.

However, the company has changed its capital structure and has been aggressively returning capital to shareholders via share buybacks over the past three years. Celestica’s books remain strong, but I will continue to monitor the company’s financial statements in the coming quarters to report on any significant changes investors should be aware of.

Bottom line

Many analysts will point to Celestica’s dual-class share structure as one of the main drivers of the company’s return to profitability and prominence in the Canadian manufacturing sector. For a number of reasons, I remain on the sidelines, watching and learning from how the company evolves, and I recommend the same for the readers.

Stay Foolish, my friends.

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