Celestica’s turnaround momentum

12-04-2023
Celestica’s turnaround momentum

What’s driving the biggest year-to-date gainer on the TSX?

 

The TSX Composite has kept its head above water for most of this year, but barely. As of the close on Nov. 17, the year-to-date gain was just over 4%. That’s a lot better than last year but well behind the S&P 500, which has gained 17.57% so far in 2023.

What’s the S&P got going for it that we don’t? Information technology, that’s what. Mega-tech companies have been the driving force behind the S&P and Nasdaq year-to-date. As of Nov. 17, the S&P 500 Info Tech Index was up almost 50% in 2023. The rest of the S&P was more-or-less flat.

It’s not that Canada doesn’t have any tech companies. We do, and they’re performing well. The TSX Capped Information Technology Index has gained 48% this year. That’s far and away the best performance among the TSX sub-indexes, but it doesn’t have much impact on the composite because technology companies only have a weighting of 7.3%. The S&P tech weighting is 27.5%.

Our best-known tech company is Ottawa-based Shopify. It operates world-wide and has a market cap of almost $120 billion. The stock has almost doubled this year, but that’s after a stunning 80% decline that began in the fall of 2021 and continued through most of 2022. The shares are currently trading at about half their all-time high, reached in November 2021.

The most intriguing Canadian tech story is that of Celestica Inc. (TSX: CLS), which emerged from nowhere to post the biggest gain on the TSX Composite this year, by far. As of Nov. 17, the stock was ahead 152% in 2023, and still gaining. What’s going on?

First, some history. Toronto-based Celestica employs 26,000 people. It first saw the light of day in 1996 as a subsidiary of IBM. In 1996, it was sold to Onyx Corp. Onyx has been divesting its shares recently.

CLS began trading publicly in 1998 with the sale of 20.6 million shares at US$17.50. That was during the dot-com boom, and like everything else tech related, the share price went wild in the next few years. The stock reached an all-time high of C$108.80 in November 2000, then collapsed.

The turnaround algorithm

By March 2003 the stock was trading below C$17, and since then, it has bumped along in the mid-teens, largely ignored by investors. Until this year, that is. The stock began 2023 in the $15 range, cracked through the $20 level in July, and has just kept going. It closed Friday at $38.46, up $0.62 on the day. Closing price in New York was US$28.05.

The turnaround dates back to 2016, when the company embarked on a plan to diversify its portfolio, invest in engineering offerings, and improve profitability. The goal was to become “the undisputed industry leader in product and platform solutions across higher value markets.” These markets include defence and aerospace, healthtech, communications, industrial, and capital equipment.

One of the key drivers of the stock is the company’s development of artificial intelligence (AI) solutions. Its 800G family of network switches supports cutting-edge AI, Machine Learning (ML), and high-performance computing requirements.

To encourage investors to revisit the stock, the company aims at improving adjusted earnings per share by 10+% annually over the long term. The immediate goal is to generate adjusted EPS of $2.40 or more in 2025.

The transformation started to pay off in the 2022 fiscal year. The company reported a 29% increase in revenue, to $7.3 billion (amounts in U.S. dollars), the highest since 2011. Of that, $4.3 billion came from Connectivity and Cloud Solutions and the remainder from Advanced Technology Solutions. Adjusted earnings per share were $1.90, highest in the company’s history.

Growth has continued this year. Third-quarter revenue was just over $2 billion, up 6% from the same period last year. Adjusted earnings per share came in at $0.65 compared to $0.52 the year before.

For the first nine months of the year, revenue was $5.8 billion, up 11.5% from $5.2 billion in 2022. Adjusted net earnings were $202 million ($1.68 per diluted share), up from $166 million ($1.34 per share) in the prior year.

Celestica projects fourth quarter revenue will be between $2.0 and $2.15 billion. Adjusted earnings per share are forecast to come in between $0.65 and $0.71.

The stock does not pay a dividend. However, the company expects to launch a new normal course issuer bid this month that would allow it to repurchase up to 10% of its public float.

Despite the recent price run-up, the stock trades at a reasonable p/e ratio of 16.65. I rate it a buy for long-term growth.

Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.

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Notes and Disclaimer

Content © 2023 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.

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