Last month, Celestica (TSX:CLS) posted an impressive second-quarter performance, beating its guidance. Amid upbeat quarterly performance and a strengthening demand outlook, the company’s management has raised its 2025 guidance, thereby driving investors’ confidence and Celestica’s stock price. Since reporting its second-quarter earnings on July 28, the company’s stock price has increased by 23.6% and is up 121.8% for this year.
On the back of its solid returns this year, let’s examine Celestica’s second-quarter performance and growth opportunities to determine whether the stock is a buy at these levels.
Celestica’s second-quarter performance
In the June-ending quarter, Celestica posted revenue of $2.89 billion, higher than the management guidance of $2.575-$2.725 billion. Year over year, its top line grew 21% amid revenue growth in both its CCS (Connectivity & Cloud Solutions) and ATS (Advanced Technology Solutions) segments. Supported by a solid performance from its Hardware Platform Solutions, the CCS segment posted revenue of $2.07 billion, representing a 28% increase from the previous year’s quarter.
Meanwhile, the revenue from Hardware Platform Solutions has grown by 82% to $1.2 billion. Further, the ATS segment’s revenue rose 7% to $820 million. Supported by topline growth, higher gross margin, and lower SG&A (selling, general, and administrative) expenses, the company’s adjusted operating income grew 43.5% to $214.7 million. Its adjusted operating margin expanded by 110 basis points to 7.4%.
Further, its adjusted net income came in at $161.2 million, with its adjusted EPS (earnings per share) at $1.39, representing a 54.4% increase from the previous year’s quarter. Along with a 49% increase in adjusted net income, a decline of 3.6 million outstanding shares due to share repurchases over the last four quarters boosted its adjusted EPS. Additionally, the company generated $152.4 million of cash from its operations, while its free cash flows stood at $119.9 million. It closed the quarter with $314 million of cash and cash equivalents, while its total liquidity stood at $1 billion. Therefore, I believe Celestica is well-equipped to fund its growth initiatives.
Celestca’s growth prospects
The growing adoption of artificial intelligence (AI) has prompted hyperscalers to expand and upgrade their data centres. The growing investment has increased demand for Celestica’s networking switches, such as 400G and 800G switches, and AI/ML (artificial intelligence/machine learning) compute devices. Further, the company is also expanding its product offerings through new innovative launches, including ES1500 and SC6110. Additionally, with the rising defence budgets amid the ongoing geopolitical tensions, the demand from the aerospace and defence sector could remain steady, thereby driving the financials of its ATS segment.
Moreover, Celestica’s management has raised its 2025 guidance after posting its second-quarter performance. Now, the management expects its topline to be at $11.55 billion, up from earlier guidance of $10.85 billion. The new guidance represents a 19.7% increase from its 2024 levels. Further, the management expects its operating margin to improve from 6.5% in 2024 to 7.4%, while its adjusted EPS could increase by 41.8% to $5.5. The company is also hopeful of generating $400 million of free cash flows, representing a 30.8% year-over-year increase. Therefore, Celestica’s long-term growth prospects look healthy.
Investors’ takeaway
Celestica has been one of the top performers over the last three years, delivering 1,930% returns at an annualized rate of 273%. Usually, higher returns raise concern over the company’s valuation. However, Celestica trades at two times analysts’ sales projections for the next four quarters, which looks reasonable, especially with the company’s management predicting an adjusted EPS growth of 42% in 2025. Considering all these factors, I believe the uptrend in Celestica’s stock price will continue.
