CANADA BEST IDEAS: MORE TO GO
THE TD COWEN INSIGHT
Following the recent sell-off, we believe CLS trades at an attractive multiple on both an absolute and relative basis. At ~11x C25E P/E and NTM PEG of ~0.6, we believe this is a lucrative entry point for investors. We see AI investments supporting CLS's momentum through next year as CLS provides a differentiated offering from North American EMS peers (~14x C25E P/E) and Taiwanese ODMs (~16x).
Summary Of Our Thesis
CLS's hyperscaler customers are in an arms race to establish GenAI leadership, despite concerns relating to the ROI of AI infrastructure investments. We continue to believe Celestica is well positioned for continued growth from AI infrastructure investments, supported by its leading communications portfolio and server expertise with key partner relationships. We also believe there is upside to 2025 consensus estimates.
What Is Underappreciated Or Misunderstood?
We believe current valuations underappreciate CLS's unique ODM business, which should trade at a premium given market leadership, higher ASPs, margins, and defensibility. Our sum-of-the-parts analysis implies the non-HPS business currently trades at 3.0x C25E EV/ EBITDA, less than half the multiple of current EMS peers.
Catalysts & Milestones To Watch
Key catalysts include winning additional server customers, the 800G upgrade cycle, and the October Investor Day, where we expect to get an update on 2025 expectations. Winning additional server customers is possible given the strong execution and value added to CLS's largest customer. This could drive upside to estimates and diversify the Enterprise customer base.
With Ethernet expected to account for the majority of networking growth and 800G switches commanding an ASP uplift, we believe CLS will continue to be a strong beneficiary of ongoing AI investments. CLS has won all existing customers' programs migrating to 800G from 400G, with 800G expected to ramp throughout C25E.
Price Target & How We Value The Stock
Our $61 price target is based on a 9.0x multiple to our C25E EBITDA. CLS currently trades at 7.4x forward EBITDA, below EMS peers at 7.6x and ODM peers at 12.0x.
What Is The Bear Case & The Risks To Our Call?
There are risks that CLS's hyperscaler customers pull back capex on tighter investment scrutiny. However, management highlighted that current demand signals remain strong and the company is having discussions for orders into next year, supported by hyperscale capex consensus estimates of ~12% growth in C25E. We also believe server product transitions could create quarterly volatility, but do not impact our full-year 2025 view.