When a company has 36 manufacturing sites in 14 countries, a pandemic is going to test its operational ability like nothing else. If the company manages to get out of the worst part of the pandemic in relatively good shape, investors will be making a beeline to buy its stock.
Celestica (TSX: CLS)(NYSE: CLS) is a design, manufacturing, hardware platform, and supply chain solutions provider that operates in Canada and internationally. The company recently announced its financial results for the quarter ended June 30, 2020.
The company operates in two segments: ATS (advanced technology solutions that comprises aerospace and defence, industrial, energy, health-tech, and capital equipment businesses of semiconductor, display, and power & signal distribution equipment) and CCS (communications and enterprise end markets that deal in servers and storage).
Celestica clocked revenue of $1.49 billion in the last quarter, up 3% from the same period in 2019. ATS revenue was down 11% compared to 2019, while CCS revenue increased 12% compared to 2019. ATS contributed to 34% of revenue compared to 39% in 2019, while CCS increased its share to 66% of total revenue compared to 61% in 2019.
ATS vs. CCS
Celestica’s ATS segment was impacted because of weak demand in the commercial aerospace and industrial verticals. Health-tech and capital equipment had strong demand that helped offset some of the weakness, but it wasn’t enough to stop a revenue dip.
The company’s joint design and manufacturing (JDM) offering boosted the CCS segment as communications revenue was up 14% compared to last year. The communications share of revenue in the CCS segment grew to 43% from 39% in 2019. Enterprise revenues also received a boost from JDM, as it was up 10% quarter on quarter. Celestica’s JDM business hit over $400 million of revenue, up 85% from 2019.
The road ahead for this TSX stock
Celestica’s Europe business was severely hit in the first half of Q2, as the continent imposed a lockdown. However, the company says it sees Europe slowly opening up again, which is a positive. The pace at which markets open will be crucial to its industrial vertical, and this segment is dependent on how soon COVID-19 can be controlled or managed.
The company’s global operations have largely stabilized and are now operating at 95%. Celestica’s supply chain is slowly returning to normal, as its suppliers ramp up capacity to meet increased demand in certain markets. China is operating at over 90% since early March and has been joined by Thailand and Malaysia. Europe and North America are in the 85-90% range.
Celestica expects its Q3 performance to be roughly at the same level as Q2. This means a greater focus on CCS, as it waits for the ATS segment, aerospace, and industrial in particular to recover.
The last time I had written about Celestica was in May when it was trading at $8.06. Investors would have earned returns of 37% if they had invested in Celestica then. Analysts have given Celestica a price target of $12.48 from current levels — upside of almost 13% from current levels. I believe the company will hit that target sooner rather than later.
