Celestica (TSX:CLS) is an electronics manufacturing services (EMS) company. This means that it designs and manufactures hardware for the tech industry. It had been overlooked for many years, but now, Celestica stock is on a tear, up 77% in the last 90 days and 254% in the last three years.
Here’s why I think it’s still undervalued, even after that phenomenal run.
Improving results
When we look at Celestica, it’s important to remind ourselves a little bit about where it came from. Ten years ago, the company was struggling, attempting to transform its business. You see, the company had been operating as an EMS company that is simply a producer of components. The only way to compete was on pricing and this led to slim margins and a not-so-profitable business.
So, in an attempt to drive up margins and add more value, Celestica began to focus on becoming more involved in the early stages of product design, thereby adding value to customers through innovation. In 2023, Celestica’s generated operating margin was 6%, and its free cash flow was just under $200 million. This compares to an operating margin of roughly 3% in 2014 and a free cash flow of roughly $100 million.
Through all this, Celestica stock (CLS) has doubled its book value to over $20.
Continued strong growth expected
It’s fair to say that Celestica’s growth will likely continue strong. In fact, management is forecasting revenue growth of 11% in 2024, with an operating margin of 5.5% to 6% Analysts are forecasting that earnings will grow more than 20%.
Celestica’s diverse business, which includes 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.
For example, the industrial and smart energy business grew 29% in 2023. While there was some weakness toward the end of the year, this business is supporting by structural trends such as EV charging and smart energy.
Furthermore, artificial intelligence (AI) is anticipated to be the next long-term technology investment cycle. In fact, the total addressable market for AI is anticipated to increase at a compound annual growth rate (CAGR) of 21% over the next four years.
Accordingly, companies are making big investments in their AI capabilities. And Celestica’s connectivity and cloud solutions segment is set up to benefit from this. The business achieved a 10% increase in revenue in the fourth quarter of 2023, with a 6.7% operating margin.
Celestica’s stock valuation remains low
While Celestica’s stock price is clearly not as undervalued as it was 10 years ago, it remains undervalued. In fact, it trades at 16.3 times this year’s consensus earnings estimate and a mere 14.7 times next year’s estimate. The expected earnings growth rates are 20% for 2024 and 11% for 2025.
Celestica’s balance sheet remains strong, with net debt of $239 million and a $370 million cash balance, and total liquidity of $1 billion.
