High-Performance Switch Demand And Next-Generation AI Programs Will Create Opportunity

Key Takeaways

• Strong demand from hyperscaler customers and an expanding pipeline suggest positive future revenue prospects for Celestica.
  
• Strategic decisions in the A&D business and ongoing share buybacks aim to enhance profitability and EPS growth.
  
• Celestica's reliance on hyperscaler customers and trade policies poses risks to revenue and earnings due to potential changes in demand, operational costs, and investment needs.

Catalysts

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

• Celestica's CCS segment is experiencing robust demand from hyperscaler customers, particularly for high-performance networking switches, which could drive revenue growth.
  
• The company's expanding pipeline, driven by new program awards and customer reaffirmations, indicates potential for increased future revenues.
  
• The transition and ramp-up of next-generation AI/ML compute programs are expected in H2 2025, suggesting future revenue growth.
  
• The strategic decision to not renew a dilutive margin program in the A&D business is anticipated to improve ATS segment profitability and margin.
  
• Continued share buybacks are expected to support growth in EPS, reflecting strong capital allocation strategy.

Celestica Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Celestica's revenue will grow by 13.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.2% today to 5.8% in 3 years time.
• Analysts expect earnings to reach $855.9 million (and earnings per share of $6.36) by about May 2028, up from $422.4 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $732 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.9x on those 2028 earnings, down from 23.7x today. This future PE is greater than the current PE for the US Electronic industry at 21.5x.
• Analysts expect the number of shares outstanding to decline by 3.21% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.14%, as per the Simply Wall St company report.

Celestica Future Earnings Per Share Growth

Risks

• Trade policy uncertainty and frequent adjustments could impact Celestica's operations and customer decisions, potentially affecting revenue and earnings stability.
  
• The potential for tariffs and trade restrictions to change poses risks, as the impact on Celestica’s operational costs and supply chain could affect net margins if absorbed by the company rather than passed on to customers.
  
• Heavy reliance on hyperscaler customers for growth in the CCS segment increases vulnerability to changes in these customers' CapEx or demand forecasts, which could adversely affect revenue if there's a slowdown.
  
• The challenges in transitioning complex electronics production to different regions in response to tariffs may require significant investments in new facilities or capabilities, potentially impacting cash flows and increasing capital expenditure.
  
• Potential delays or dynamics in technology transitions (e.g., AI/ML compute programs) could lead to uneven revenue streams and affect earnings predictability, particularly if new program ramps or customer transitions are slower than expected.

Valuation

• The analysts have a consensus price target of CA$202.381 for Celestica based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$230.1, and the most bearish reporting a price target of just CA$174.66.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $14.7 billion, earnings will come to $855.9 million, and it would be trading on a PE ratio of 21.9x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of CA$120.48, the analyst price target of CA$202.38 is 40.5% 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.