Celestica Inc.: A Good Quarter But Limited Visibility Going Forward

The company’s turning around, but the industry is a tough nut to crack.

| More on:
The Motley Fool

Celestica (TSX: CLS, NYSE:CLS) has risen 11% on higher than average volumes since the company reported its second quarter 2013 results
last Friday.  This due to the fact that results were better than analyst expectations.  Let’s take a quick look at a snapshot of the results.

Q2   Results
($US   billion)



% change









Operating   Margin












Revenue declined 14.3% while EPS declined 4.5%.  Margins were 40 basis points lower due to excess capacity in the semiconductor business as well as restructuring efforts.  Excluding the effect of losing Blackberry’s business, which accounted for approximately 20% of revenues in 2012, revenue was up 3%.  This is a very impressive performance and shows that management has done an excellent job replacing Blackberry.

Sequentially (quarter over quarter), the numbers tell a different story.  There was growth across all markets except servers.  The sequential strength in second quarter results was driven by the communications segment, as demand was much better than expected.

Sequential Revenue Growth











Celestica’s strategy has been to diversify its customer base, get into higher margin markets, and accelerate revenue growth.  The company has made progress on these targets but still has a ways to go.

CLS sales segments

As we can see from the chart, Celestica has successfully diversified into a variety of end markets.  Further to this, Celestica’s top 10 customers contributed 66% of revenue this quarter down from 71% last year.  And there is only one customer that accounts for more than 10% of revenue.  So while we would like to see even greater diversification to further mitigate the risk in investing in the stock, good progress has been made.

While progress on revenue growth has been good, the outlook is uncertain.  In addition, the company is still seeing operating margins deteriorate.  This quarter saw a 40 basis point decline in margins due to excess capacity in the semiconductor business as well as restructuring efforts.

Going Forward

On the conference call, management reiterated that the demand environment right now is volatile, which makes forecasting difficult.  Visibility beyond 90 days is very poor.  For the third quarter of 2013, management expects challenging end markets and is forecasting total revenues of $1.425 to $1.525 billion and EPS of $0.17 to $0.23 (not including the share buyback).  At the mid-point of this guidance range, this equates to a 1.3% decline in revenue and a 4.8% decline in EPS.  Celestica is in the enviable position, though, of having a very strong balance sheet with minimal debt and a cash balance of $554 million.  Plans for a share buyback program, whereby the company will buy back up to 10% of shares in the next year also bodes well for shareholders.

Bottom Line

Celestica’s management is doing an impressive job turning the company around.  But while sequential revenue growth has been better than expected, the fact remains that the macro environment in which the company operates is still very uncertain, so predictability of earnings and revenues is very low.  The stock is trading at roughly 22x earnings.  Celestica’s strong balance sheet is surely a big reason why the stock is trading at this multiple.  At this point, however, investors should be questioning whether the stock warrants this multiple given the challenges that it faces and the results that we have seen.

Celestica’s stock has had a nice run but remains trapped in a highly challenging business environment.  For a smoother ride to market thumping investment returns, a proven strategy is to invest in those businesses that dominate their environment, not the other way around.  In the Motley Fool’s special FREE report “3 U.S. Stocks That Every Canadian Should Own” we profile 3 such businesses.  Simply click here now to download your copy of this report at no charge.

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool Canada’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.

Follow us on Twitter and Facebook for the latest in Foolish investing.

Fool contributor Karen Thomas owns shares in Celestica.  The Motley Fool doesn’t own shares of any of the companies mentioned at this time.        

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

food restaurants

If I Could Only Buy 1 TSX Stock for the Next 10 Years, This Would Be It

Here's why Restaurant Brands (TSX:QSR) remains my top pick on the TSX for long-term investors seeking excellent total returns.

Read more »

data analyze research
Bank Stocks

The 1 Canadian Bank Stock I’m Watching This Week

Bank of Montreal (TSX:BMO) stock is starting to look dirt-cheap after its post-earnings fumble.

Read more »


The Best Stock to Invest $1,000 in Right Now

Cineplex has emerged from the pandemic riddled with debt but also with a stronger underlying business and stock that grossly…

Read more »

Golden crown on a red velvet background
Dividend Stocks

3 Top Dividend Stocks to Start a Growing Passive Income Stream

Start a growing passive income stream with shares like Canadian Utilities that boast five decades of dividend growth.

Read more »

Stocks for Beginners

3 Growth Stocks Wall Street Might be Sleeping On, But I’m Not

These growth stocks have more than doubled in the last year, yet there could certainly be more growth on the…

Read more »

diamonds, hidden gems

2 Undervalued Gems to Watch in March 2024

Value stocks such as Air Canada and Exchange Income trade at a compelling discount to consensus price target estimates.

Read more »

TFSA and coins
Dividend Stocks

TFSA Investors: Where to Put $7,000 in 2024

These top TSX dividend stocks now offer yields near 8%.

Read more »

Coworkers standing near a wall
Energy Stocks

3 Things About Enbridge Stock Every Smart Investor Knows

Enbridge stock (TSX:ENB) continues to be one of the best dividend stocks out there, but with a payout ratio of…

Read more »