Positive Outlook
Celestica (NYSE:CLS) has recently exceeded my modest expectations with their Q4 results. As someone who invests with an eye for inflection points, I prioritize understanding investor sentiment over chasing after high-growth stocks.
In light of this, Celestica’s Q1 2024 outlook has astounded me in the best possible way. Despite management’s cautious outlook for 2024, I interpret it as a prudent stance at this early stage.
The current stock price indicates that Celestica is trading at roughly 21 times this year’s free cash flow. This valuation seems compelling for a company with a 12% Compound Annual Growth Rate (CAGR) this year.
My target price of $45 per share by the summer of 2025 exemplifies my confidence in the company’s future prospects.
Reframing the Outlook
On examining Celestica’s Q1 2024 performance, it becomes evident that their earnings per share (EPS) are anticipated to grow by a staggering 60% year on year. This projection substantially outperforms my earlier estimate of 15% CAGR in 2024. The robust Q1 performance foretells a potential EPS of over $3.00 in 2024, marking a 23% year-on-year CAGR, which significantly surpasses my prior expectation.
Without a doubt, there are numerous reasons to find favor with this situation.
The Appeal of Celestica
Celestica is a company that offers design, manufacturing, and supply chain services to a variety of industries, including technology, healthcare, and aerospace. By serving as a strategic partner, Celestica aids businesses in bringing their products to the market by providing services such as product development and supply chain management. The company’s optimistic guidance for the fourth quarter of 2023 hints at promising prospects in the near term.
This versatile company operates through two primary segments, Advanced Technology Solutions (“ATS”) and Connectivity & Cloud Solutions (“CCS”). Their robust growth in the CCS, driven by investments in data center capacity, positions Celestica for a solid 2024.
Nevertheless, challenges persist, particularly in the capital equipment sector and the wafer fab equipment market. The softness in the semiconductor industry continues to cast a shadow. However, I maintain hope for improvement in these areas in the near future.
Predicted Revenue Growth
Celestica’s guidance indicates a potential 18% growth at the upper limit in Q1 2024. Even if this is the pinnacle for Celestica in Q1, the outlook suggests that the rest of 2024 should witness growth of at least 15% CAGR. This contrasts with Celestica’s guidance of at least 8% year on year, equating to $8.50 billion in 2024. However, the context is critical. It is understandable that Celestica is exercising caution to avoid overpromising and underdelivering, particularly after their stellar Q4 2023 performance. Thus, my belief that Celestica will achieve around 12% CAGR in 2024 stands firm.
Such incremental changes can yield a significant impact on investor sentiment and valuation in a slow-growth business.
Valuation and Outlook
Celestica currently holds a net debt position of $240 million, a decrease from the $260 million reported in the previous quarter, Q3 2023. Looking ahead, Celestica has raised its free cash flow outlook, aiming to deliver at least $200 million in free cash flow, a figure well within its reach. If we take this expected free cash flow of $220 million at face value, Celestica’s valuation at 21 times forward free cash flow seems reasonable for a business anticipating 12% CAGR in 2024.
It is worth noting that while management has indicated a commitment to returning a portion of its free cash flows to shareholders, the impact of future share repurchases on my investment thesis appears limited.
In Conclusion
In conclusion, my decision to invest in Celestica revolves around its status as an undervalued stock with modest growth potential, providing diversification in my portfolio. The company’s recent Q4 results and optimistic Q1 2024 outlook align well with my investment thesis. A key factor reinforcing my confidence is Celestica’s valuation at approximately 21 times free cash flow. Despite being a slow-growth business, this valuation appears appealing, especially when considering the projected 12% CAGR in 2024. The company’s commitment to returning a portion of its free cash flows to shareholders further enhances its allure. Thus, maintaining my price target of $45 per share by the summer of 2025, I am convinced that Celestica’s undervalued position and sound financial outlook make it a compelling long-term investment.
