Celestica Inc CLS

RBC Raise Target

[retiredcf]

Their upside scenario target is also raised to $90.00. GLTA

October 23, 2024

Outperform

NYSE: CLS; USD 57.47; TSX: CLS

Price Target USD 75.00 ↑ 65.00

Celestica Inc.

Improving visibility to long-term growth and profitability

Our view: Celestica delivered another solid beat and raise Q3. While FY25 revenue guidance was just in line with consensus (FY25 EPS guidance above consensus), we believe upside is likely, given typical conservatism. Celestica is seeing increasing traction at hyperscalers and a mix shift to higher margin programs. With increasing visibility to long-term growth and profitability, we believe Celestica's valuation is likely to continue to re-rate upwards. Maintain Outperform, increasing price target to $75.00.

Key points:

• Another quarterly beat. Q3 revenue was $2.50B (22% Y/Y), above consensus at $2.41B (RBC $2.42B) and guidance ($2.325-2.475B). The Q3 upside (4%) was in line with the TTM average (4%), though below last quarter (6%). On a shift to high-margin segments, Q3 adj. EPS of $1.04 was ahead of consensus at $0.93 (RBC at $0.95).

• StrongswitchmomentumdrivesQ3strength.TheupsidecamefromCCS Communications, where revenue up was 14% Q/Q to $1.065B, above our estimate for $0.985B. Y/Y growth was 45% Y/Y, ahead of guidance for low 30%. Celestica saw stronger demand for 400G switches and a faster ramp of 800G switches at hyperscaler customers.

• Hyperscaler strength is broadening. While revenue at Celestica's largest customer declined 18% Q/Q on the widely expected program transition, revenue from Celestica's #2-10 customers (mostly hyperscalers) increased 19% Q/Q (37% Y/Y). Celestica expects revenue from other hyperscalers to continue to ramp going forward and called out a new custom AI/ML win at Groq (ramping early 2025), a 1.6T switch win at a large hyperscaler (ramping 2026), and “active” discussions with other hyperscalers (potentially ramping 2025 to 2027).

• Q4 guidance ahead of expectations, FY25 upside likely. Q4 guidance calls for $2.425-2.575B revenue and $0.99-1.09 adj. EPS, with the mid- point ahead of consensus at $2.445B and $0.95. For FY25, Celestica has “high confidence” in achieving $10.4B revenue and $4.42 adj. EPS, which compares to consensus at $10.4B and $4.07. Celestica provides conservative guidance, which suggests upside to this outlook, in our view. Over the last 3 years, Celestica has exceeded its initial annual revenue guidance by 11% and adj. EPS by 40%.

• Improving long-term visibility = upwards valuation re-rating. Celestica is trading at 13x NTM P/E, below EMS peers (at 16x). We believe Celestica's valuation multiple is likely to re-rate upwards, as: 1) above peer EPS growth is sustained (20% vs. peers at 11%); 2) the mix of ODM revenue continues to rise (currently 30% of revenue, while ODMs trade at 18x NTM P/E); and 3) strengthening momentum in strategically important end markets (e.g. hyperscaler, HPS, aerospace & defence, capital equipment). Our updated $75.00 price target reflects our revised estimates and equates to 17x CY25e P/E (unchanged), which is slightly above EMS peers (at 16x).