The tech industry is benefitting from the artificial intelligence boom. This has lifted tech stocks like Celestica (TSX:CLS) much higher as they benefit from growing demand. In April, Celestica reported very strong results that once again highlighted this. Since then, Celestica’s stock price is up 44%.
Here’s what you should know.
Celestica stock: Strong returns yet still undervalued and underappreciated
I’d like to look at Celestica stock’s long-term performance as well as its short-term performance.
Over the last five years, Celestica’s stock price has increased 880% to current levels of over $82. This was no easy feat and was driven by a transformation at the company that has proven to be very successful.
In fact, years ago, Celestica was a low-margin commodity electronic manufacturing services (EMS) provider that was seeing little to no growth. Since then, Celestica has built a business focused on value-added services and innovation to drive margins and growth.
Celestica’s diverse business, which includes the advanced technology services segment and its connectivity and cloud solutions segment, is benefitting from strong secular tailwinds that will likely drive continued growth for Celestica.
Yet, Celestica stock remains undervalued, trading at 4.1 times book value versus its peer group, which is trading at a five times book value. This valuation appears all the more undervalued when we consider that Celestica’s return on equity (ROE) and return on invested capital (ROIC) stand at a very healthy 19% and 24.8%, respectively.
Celestica’s results shine
Looking at Celestica’s recent results, we can see that the company is benefitting from strong demand and production efficiencies. In fact, in the first quarter of 2024, revenue increased 20% to $2.21 billion. Also, adjusted earnings per share (EPS) increased more than 80% to $0.85. Finally, Celestica’s operating margin came in at 6.2%, and its free cash flow was $65 million compared to $9 million.
These results were better than both management’s and investors’ expectations, as the momentum in the business has been stronger than expected. Looking ahead, we can expect to see more of the same, as this momentum continues.
Guidance increased
As I mentioned in my introduction, the growth in artificial intelligence is one of the key drivers of Celestica’s success. It has, in fact, driven growth in all of the company’s different segments, such as Celestica’s connectivity and cloud solutions (CCS) segment. And it will continue to drive growth in the future.
Management has increased its second-quarter and year-end 2024 guidance in accordance with these strong trends that they are seeing. For the second quarter, management expects revenue to come in between $2.175 billion and $2.35 billion, for a 16% growth rate at the midpoint. Also, management expects EPS to come in at between $0.75 and $0.85 for a 45% growth rate at the midpoint. For 2024, revenue is expected to increase 14% to $9.1 billion, and EPS is expected to increase 36% to $3.30.
The bottom line
Celestica stock is a lesser-known tech stock benefiting from the artificial intelligence boom. Today, the shares remain undervalued as the company continues to benefit from strong demand and momentum in its end markets.
