CIBC Follow SuitRaise their target by 13% to US$68.00. GLTA
EQUITY RESEARCH
October 24, 2024 Earnings Update
CELESTICA INC.
Strong Q3, With 2025 Outlook Confirmed
Our Conclusion
Celestica reported stronger Q3/24 results than FactSet (4% higher on revenue, 12% higher on EPS). The Q4 guide was also stronger (+2% revenue, +9% EPS) and 2025 (in-line revenue, +9% EPS). Celestica’s 2025 outlook is based on better visibility for network switch products and a new server program planned for the second half. We expect Celestica shares to rise on this report and its two noteworthy wins (Groq and a 1.6TB switch program win).
While Celestica is an excellent company and the 2025 visibility is
encouraging, our Neutral rating is unchanged. To reconsider our view, we
would need to see a re-acceleration in its growth, including within Enterprise,
supported by rising hyperscaler customer capex in 2025. Our price target
has been updated to 2025E (prior 2024E). At $68, it’s based on 15x (prior
17x) our 2025E EPS (primary) and 10x our 2025E EBITDA (secondary).
Key Points
Q3 revenue was $2.5B (vs. FactSet $2.414B) and adjusted EPS was $1.04.
(FactSet $0.93). The Q4/24 revenue guide is $2.5B (FactSet $2.451B) and
EPS of $1.04 (FactSet EPS of $0.95). For 2025, the guide is for revenue of
$10.4B (in line with FactSet) and EPS of $4.42 (FactSet $4.07).
Celestica’s hyperscaler exposure for GEN-AI is the most important growth
driver for its CCS units. The Enterprise unit (at 25% of Q3/24 revenue, last
quarter 29%) grew 40% Y/Y. In Q4/24 and 2025, its growth looks to
decelerate and remain at a reduced level until the new server program is
launched in the second half of 2025. We forecast growth of -2% in Q4/24 and
-14% in 2025. The Communications unit grew by 44% Y/Y (~42% of Q3
revenue, 39% last quarter) and we forecast growth of 58% in Q4/24 and 26%
for 2025 based on switch program demand.
Our 2025 forecast is based on three factors including Communications
revenue growth with existing and new customers, decelerating Enterprise
revenue with a recovery in H2 offset by muted ATS revenue. Margins are
conservatively assumed to be up modestly. Our thesis is based on:
1. Slower revenue growth: We expect CCS’s Communications and
ATS’s A&D to be the strongest contributors to growth. Forecast risks
include lumpiness in hyperscalers demand in Enterprise.
2. EPS leverage tied to growth: Margins are expected to be slightly
higher based on some moderation in CCS margins due to
competition, offset by improving ATS margins within A&D and
Capital Equipment.
3. Valuation premium to peers: On 2025E FactSet estimates,
Celestica trades at 13.8x EPS and 9.3x EBITDA while peers trade at
12.3x EPS and 7.1x EBITDA. Given its higher growth, comparable
margins, and GEN-AI exposure, Celestica’s valuation, in our view
should continue to trade at a premium to peers