Celestica Inc T.CLS

RBC

[retiredcf]

Celestica Inc. (NYSE: CLS; TSX: CLS)
Outperform, $65.00 price target

We expect Celestica to report solid Q3 results, with potential upside to consensus and guidance, driven by strong switching demand, given continued hyperscaler build-outs of data centers. Similar to the past two quarters, Celestica may raise FY24 guidance. Moreover, Celestica is likely to provide an updated outlook for FY25, which we expect in line with consensus. Maintain Outperform rating.

Celestica to report Q3 and host virtual investor meeting on October 23. Celestica will report Q3/FY24 results on October 23, after market close. Celestica will host its quarterly conference call and virtual investor meeting on October 23 at 5:00 p.m. ET. Webcast is available here.

Q3 may exceed RBC/consensus as switching ramp is likely to offset flat enterprise. Over the past 4 quarters, Celestica has averaged quarterly revenue 4% and adj. EPS 13% above consensus. In light of strong hyperscaler switching demand (as shown by ODM peer Accton's results), we believe Celestica’s Q3 could reach the high end of guidance for $2.475B revenue, which would exceed our estimate for $2.425B revenue (19% Y/Y) and consensus at $2.413B. Similarly, we believe adj. EBITDA may slightly exceed our estimate for $194MM (33% Y/Y) and consensus at $192MM, and adj. EPS may be higher than RBC/consensus at $0.95/$0.93. Additionally, Celestica repurchased 2.05MM shares in Q3 for $90MM ($43.88/share average), which will add ~$0.01 to Q3e adj. EPS.

Celestica likely to raise FY24 guidance. Celestica has raised guidance twice so far in FY24. Last quarter, Celestica raised FY24 guidance to $9.45B revenue ($9.1B prior) and $3.62 adj. EPS  ($3.30 prior). We believe guidance is conservative, given the implied deceleration in CCS growth (from 45% Y/Y 1H to mid-twenties 2H), and provides room for upward revisions on sustained hyperscaler demand. Q4 consensus estimates call for revenue of $2.445B, which assumes CCS growth slows to 20% Y/Y and ATS growth improves to 2% Y/Y (vs. low single-digit declines Q3).

Celestica is likely to update its medium-term outlook at investor meeting. Last year at its investor meeting in November, Celestica provided a preliminary outlook for revenue of $8.9-9.3B in FY25e and $9.5-10.0B in FY26e, along with adj. EPS targets of $2.97-3.10 in FY25e and $3.27-3.55 in FY26e. We believe Celestica may increase its FY25e outlook to >$10.3B (10% Y/ Y) and adj. EPS of >$4.00, effectively in line with RBC/consensus at $10.3B/$10.4B and $3.93/ $4.07, respectively. Similarly, for FY26e, we anticipate that Celestica may raise its outlook to $10.5-11.0B revenue (3% Y/Y mid-point) and $4.00-4.20 adj. EPS.

Switching demand may drive upside to Q3 CCS revenue. Our model calls for CCS revenue to fall 1% Q/Q to $1,600MM Q3, with Y/Y growth slowing to 35% from 51% Q2. We forecast CCS Communications revenue to rise 5% sequentially to $985MM, with Y/Y growth of 34%, in line with guidance for low-30% increase. We believe strong demand for switches from hyperscalers may drive CCS Communications revenue above our estimates. For CCS Enterprise, our model calls for revenue to decline 11% Q/Q to $615MM, with Y/Y growth consistent with Q2 at 37% and in line with guidance for mid-30% growth.

A&D to help mitigate industrial headwinds at ATS. Our model calls for ATS revenue to increase 7% Q/Q to $825MM Q3, with Y/Y growth improving to 4% from -11% in Q2. We expect strength in aerospace & defense (A&D) and capital equipment to help mitigate continued softness in industrial end markets, primarily in EV charging. Our outlook is consistent with Celestica’s guidance for a “low single-digit” Y/Y decline.

ODM Accton reported Q3 revenue above consensus. It is our understanding that Celestica and ODM Accton (TW:2345; not covered) are the top 2 ODM providers of ethernet switches. Based on monthly revenue press releases, Accton reported Q3/FY24 (Sept-qtr) revenue of NT$28.19B, above consensus at NT$26.16B. Revenue increased 15% Q/Q, with Y/Y growth accelerating to 26% Q3 up from 21% Y/Y Q2.

Peer Jabil reported Q4 slightly above consensus. On September 26, EMS peer Jabil (NYSE:JBL; not covered) reported Q4/FY24 (August-qtr) revenue of $7.0B, above consensus at $6.6B. The company provided FY25 guidance for $27B and $8.65 adj. EPS, effectively in line with consensus at $27.2B and $8.64. For Q1, guidance calls for $6.3-6.9B revenue and $1.65-2.05, bracketing consensus at $6.5B and $1.83. Jabil indicated that there are short-term demand challenges in certain end-markets, but it sees positive secular trends in data centers, EVs, healthcare, and capital equipment.

Maintain Outperform rating. Our Outperform thesis reflects: 1) Celestica is well positioned with hyperscalers and is likely to continue to see strong growth as hyperscaler data center buildouts ramp; 2) Celestica is benefiting from a shift to higher quality end markets through its ATS and HPS segments; and 3) Celestica’s upwards valuation re-rating is likely to continue. We believe Celestica warrants a P/E valuation re-rating above peers (now 7% discount to EMS peers vs. 29% discount over the last 5 years), given the company's EPS growth outperformance (19% vs. peers at 10%) and improving revenue mix (towards differentiated HPS revenue).