Investments In AI Platforms And 800G Networking Will Secure Future Industry Leadership

Key Takeaways

• Strategic investments in AI platforms and custom designs are set to drive growth by enhancing margins and boosting earnings.
  
• Expanding customer base through strategic diversification aims to improve margins and reduce reliance on large customers.
  
• Reliance on key customers, financial reporting changes, and inventory challenges pose risks to Celestica's revenue stability, growth potential, and investor confidence.

Catalysts

Provides supply chain solutions in North America, Europe, and Asia.

• The strong demand for Celestica's networking products, particularly the growth of the 800G programs and future opportunity in 1.6T switching programs, signals robust revenue growth potential in their CCS segment. Focus on high-performance networking solutions is likely to bolster future revenue significantly.
  
• Celestica's investments in AI platforms and custom ASIC designs are expected to drive earnings growth, especially within its AI/ML compute and RAC programs. This strategic focus is likely to promote higher-margin products, positively impacting net margins and overall earnings.
  
• The company's strategic diversification by securing significant wins with digital native companies is designed to expand its customer base and reduce reliance on current large customers. This diversification can leverage higher-margin services and proprietary solutions, improving net margins and earnings.
  
• Celestica's significant investment in advanced liquid cooling technology and integrated RAC solutions can position it as a leader in emerging sectors requiring specialized hardware. This move is projected to enhance revenue streams and improve adjusted operating margins.
  
• Ongoing share repurchases and effective working capital management reflect a commitment to enhancing shareholder value, which is anticipated to lead to improved earnings per share (EPS) through reduced share count and increased free cash flow.

Celestica Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Celestica's revenue will grow by 12.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.4% today to 5.4% in 3 years time.
• Analysts expect earnings to reach $743.0 million (and earnings per share of $5.82) by about February 2028, up from $428.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.9x on those 2028 earnings, down from 33.6x today. This future PE is greater than the current PE for the US Electronic industry at 21.1x.
• Analysts expect the number of shares outstanding to grow by 3.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.85%, as per the Simply Wall St company report.

Celestica Future Earnings Per Share Growth

Risks

• The transition from IFRS to U.S. GAAP reporting could lead to challenges in financial comparisons and adjustments, potentially impacting earnings visibility and investor confidence in financial statements.
  
• The CCS segment's heavy reliance on a few hyperscaler customers for a significant portion of revenue (24% and 12% of sales, respectively) poses a risk if these relationships sour or if these customers face industry downturns, potentially affecting revenue stability.
  
• The ATC segment's flat revenue growth outlook and challenges in renewing certain contracts (like the decision not to renew a dilutive margin program) could pressure revenue and operating margins.
  
• Lower revenues in the enterprise end market due to technology transitions in AI/ML compute programs might impact short-term growth prospects and net margins, especially if ramp-ups take longer than expected.
  
• High inventory levels, despite recent reductions, could indicate potential overstocking issues or slower-than-anticipated demand, which may affect the company’s cash flow and net margins if not managed efficiently.

Valuation

• The analysts have a consensus price target of CA$201.35 for Celestica based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $13.7 billion, earnings will come to $743.0 million, and it would be trading on a PE ratio of 28.9x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of CA$179.43, the analyst's price target of CA$201.35 is 10.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.