Following recent investor meetings with its management, BMO Nesbitt Burns Thanos Moschopoulos thinks Celestica Inc. is “well-positioned to benefit from AI-driven hyperscaler capex,” pointing to accelerating demand in its Communications business.
“CLS’s Comms business was up 17 per cent year-over-year in Q1/24 and is expected to grow in the mid-40-per-cent range year-over-year in Q2/24,” he said. “We believe that CLS is a top-two ODM [original design manufacturer] (i.e., non-OEM) supplier of network switches to the large hyperscalers, counting all of the top five as customers—and AI, which has driven CLS’s server business over the past year, is now driving Comms. CLS saw a strong uptick in Comms demand from its largest hyperscaler customer in Q1/24, and this is now extending to a broader slate of hyperscalers in the current quarter. We believe a growing Comms mix might bode well for margins as, relative to CLS’s server business, the Comms business is more weighted towards higher-margin HPS [hardware platform solutions] (i.e., proprietary product designs).”
Mr. Moschopoulos sees the Toronto-based company hoping for more AI server wins, emphasizing it is now “scaling capex efficiently.”
“CLS is a key supplier of AI servers to its largest hyperscaler customer, but to our knowledge isn’t currently supplying AI servers to other hyperscalers,” he said. “CLS believes the fact that several other hyperscalers are ramping their spend on custom-silicon AI servers relative to NVIDIA might provide it with an opportunity for additional customer wins (as this should play to CLS’s strengths, with respect to managing customization and complexity).”
“Given that CLS already has a broad geographic footprint, its focus has been on adding capacity that’s adjacent to existing facilities, so that it can leverage existing G&A infrastructure and leadership teams. Its capex discipline has driven high utilization rates, contributing to margin expansion and FCF growth (with FY2024 guidance calling for $250-million of FCF, up 29 per cent year-over-year).”
Maintaining his “outperform” recommendation for Celstica shares, Mr. Moschopoulos raised his target to US$63 from US$53. The average on the Street is US$56.44.
“We view the stock’s valuation as attractive relative to CLS’s end-market exposure and our view that consensus FY2025 estimates, and our own (which currently call for 9-10-per-cent adj. EPS growth) are likely conservative, given end-market demand and the potential for further margin expansion,” he concluded.