Celestica Inc Oversold & Poised for a Rebound
Celestica Inc (NYSE:CLS) has not exactly been rewarding investors as of late. Celestica stock is down 41.2% over the last 52 weeks and is down 19.5% year-to-date. The good news? It’s sitting at a tested support level near $7.00, a level it hasn’t been at since 2012.
On the one hand, CLS stock has wiped out all of its gains over the last seven years. On the other hand, the company is in the midst of transforming itself, it has a strong balance sheet, it has been posting solid numbers, and its shares are oversold.
For risk-tolerant investors, this is a great tech stock that is poised to rebound.
Celestica Inc Overview
Celestica Inc has gone through major changes over the years. It started as a computer parts manufacturing subsidiary of IBM (NYSE:IBM) in 1994. Today it’s an electronics manufacturing giant with more than 28,000 employees and operations in 14 countries around the world. (Source: “Taking on Tomorrow, Today,” Celestica Inc, last accessed May 16, 2019.)
Celestica is a leading global provider of design, manufacturing, hardware platform, and supply chain solutions. It operates through two segments: “Advanced Technology Solutions” (ATS) and “Connectivity & Cloud Solutions” (CCS). (Source: “Company Overview April 2019,” Celestica Inc, last accessed May 16, 2019.)
As more and more companies move from hardware to software, and from software to services, Celestica Inc provides advanced technology solutions for five primary sectors: health tech, smart energy, industrial, capital equipment, and aerospace & defense.
In fact, the company is the leading manufacturing services provider to the aerospace and defense industry.
In October 2017, Celestica implemented restructuring plans to streamline its business and improve its margins. The company engaged outside consultants to help identify cost-saving opportunities.
By the company’s own admission, it faces near-term challenges in some of its key end markets. Regardless, it hopes that those challenges will ease as it forges ahead with its transformation strategy (which it is doing with a healthy balance sheet).
Celestica Inc Stock
|CLS Stock Information|
|Market Cap||$928.4 Million|
|Shares Outstanding||137.4 Million|
|50-Day Moving Average||$8.04|
|200-Day Moving Average||$8.97|
(Source: “Celestica Inc. (CLS),” Yahoo! Finance, last accessed May 16, 2019.)
Celestica stock has been trending lower since September 2018. It’s not a pretty situation. The marketwide sell-off that occurred in the fourth quarter certainly didn’t help either.
While CLS stock enjoyed the January effect, climbing 14.1%, that climb ended on February 1. That’s when the company reported its fourth-quarter and full-year results.
Fourth-quarter revenue came in on the low end of guidance and its earnings per share (EPS) were below Wall Street expectations. It didn’t help that Celestica’s first-quarter forecasts were below expectations too.
The company’s share price took a further hit on April 25, when it announced that its first-quarter revenue came in below guidance. The company also said that its second-quarter guidance was essentially unchanged from its first-quarter guidance.
Chart courtesy of StockCharts.com
Although Celestica Inc is facing headwinds, it’s knee-deep in the midst of restructuring.
Celestica stock is at an important support level and it’s in oversold territory. This points to near-term gains. Its long-term outlook remains even more bullish.
On April 25, Celestica Inc announced its financial results for the first quarter ended March 31, 2019.
First-quarter revenue was $1.4 billion, a four-percent decrease from the $1.5 billion recorded in the same prior-year period. The company’s previous first-quarter guidance range was $1.45 to $1.55 billion. (Source: “Celestica Announces First Quarter 2019 Financial Results,” Celestica Inc, April 25, 2019.)
Revenue from the ATS segment increased nine percent year-over-year and accounts for 40% of Celestica’s total revenue, compared to 36% in the first quarter of 2018. CCS segment revenue fell 12% and represented 60% of the company’s total revenue, compared to 64% in the first quarter of 2018.
Celestica reported first-quarter EPS of $0.66, compared to $0.10 in the first quarter of 2018. That big increase included a $0.75-per-share gain related to the sale of the company’s Toronto real estate property for $124.2 million. The company used virtually all of the proceeds of that sale to repay a portion of its outstanding loans.
Adjusted EPS for the first quarter of 2019 was $0.12, compared to $0.24 in the first quarter of 2018. That was at the low end of a guidance range of $0.12 to $0.18.
The company’s free cash flow in the quarter was $144.7 million, compared to -$34.1 million in the first quarter of 2018. As with EPS, that boost came from the sale of its Toronto real estate.
Also during the first quarter, Celestica Inc repurchased and cancelled 5.1 million shares for $44.5 million.
On the restructuring front, Celestica recorded about $51.0 million in restructuring charges from the start of its cost-efficiency initiative through the end of the first quarter of 2019; $7.1 million of restructuring charges were recorded in the first quarter.
Celestica Inc estimates that the total restructuring charges will end up being near the high end of its previously disclosed range of $50.0 to $75.0 million. The company expects that the rest of its restructuring charges will be recorded by the end of 2019.
As for the future of the company, Rob Mionis, President and CEO said the following:
We remain committed to our transformation strategy which we believe will drive more consistent, diversified and sustainable results in the future. Our CCS portfolio review is mostly complete and we are encouraged by the related benefits. As we continue to drive improvement in both of our segments, we intend to maintain our balanced approach to capital allocation, supported by a strong balance sheet.
Celestica is not for the risk-averse. CLS stock is sitting where it was in 2012, but that’s an important support level.
Celestica Inc is nearing the end of its restructuring efforts, it has improved its cash position, and it continues to aggressively repurchase shares. All of which the company believes will help return it to its former glory.
Celestica stock has been beaten down, but it could surprise investors with significant gains as the company’s restructuring and cost-cutting initiatives play out.