Subdued Growth No Barrier To Celestica Inc. (TSE:CLS) With Shares Advancing 26%

Despite an already strong run, Celestica Inc. (TSE:CLS) shares have been powering on, with a gain of 26% in the last thirty days. This latest share price bounce rounds out a remarkable 327% gain over the last twelve months.

Following the firm bounce in price, given close to half the companies in Canada have price-to-earnings ratios (or "P/E's") below 14x, you may consider Celestica as a stock to avoid entirely with its 38x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

With earnings growth that's superior to most other companies of late, Celestica has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Celestica

Keen to find out how analysts think Celestica's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Celestica's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Celestica's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 89% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 350% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 19% over the next year. With the market predicted to deliver 24% growth , the company is positioned for a weaker earnings result.

With this information, we find it concerning that Celestica is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

Shares in Celestica have built up some good momentum lately, which has really inflated its P/E. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Celestica's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware Celestica is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of Celestica's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.