F
|Celestica Inc. |(CLS-NYSE) |$5.80 |
Note: All new or revised material since the last update is highlighted.
Reason for Report: Minor changes in estimates Previous Ed.: October 30, 2007; 3Q07 Earnings Update
Brokers’ Recommendations: Neutral: 89.5% (17 firms); Negative: 10.5% (2); Positive: 0% (0)
Prev. Ed.: 16; 2; 1
Brokers’ Target Price: $7.01 (↓ $0.36 from last edition; 13 firms) Broker’s Avg. Expected Return: 20.9%
Recent Events
On October 25, 2007, CLS announced 3Q07 financial results. Highlights are as follows:
▪ Total revenue was $2,080.6 million, down 13.0% y/y, but up 7.4% sequentially.
▪ Pro forma EPS was 2Q07 was $0.13, down 29.0% y/y, but up 536.0% sequentially.
Overview
Analysts have identified the following key factors for evaluating the investment merits of CLS:
|Key Positive Arguments |Key Negative Arguments |
|Long-term Model: CLS focuses on high-mix/low-volume horizontal |Customer Concentration: The Company depends heavily on a few customers as |
|manufacturing, which tends to offer solid long-term returns with a lower |it derives approximately 60.0% of revenue from its ten largest customers. |
|risk profile compared to vertical manufacturing. | |
| |Economic Slowdown: A general economic slowdown (globally or in key |
|Attractive Growth Strategy: The Company plans to generate growth through |markets) could have a negative impact on the Company’s financial results |
|incremental outsourcing (with both new and existing customers), additional |and cash flow generation. |
|service offerings primarily within design, configuration, fulfillment, and | |
|supply chain management and acquisitions. |Dependency on End Market: A recovery at CLS is seen as largely dependent |
| |upon a steady revival of end markets (such as, communications and high-end |
|Long-Term Outsourcing Trend: A powerful trend toward outsourcing |IT). |
|manufacturing production by OEMs underlies a long-term positive view of the| |
|EMS industry. | |
Based in Toronto, Canada, Celestica Inc. (CLS or the Company) provides a range of electronics manufacturing services (EMS) in the fields of computing, telecommunications, aerospace, defense, automotive, consumer electronics, and industrial sectors. Through its efficient global manufacturing and supply chain network in Asia, Europe and the Americas, CLS serves companies in the computing, communications, consumer, industrial, and aerospace and defense sectors. CLS supplies products and services to over 160 original equipment manufacturers (OEMs), including Avaya Inc., Cisco Systems Inc., EMC Corporation, Hewlett-Packard Corporation, IBM Corporation, Lucent Technologies Inc., Motorola Inc., NEC Corporation, and Sun Microsystems Inc. The Company’s website is .
Note: CLS’s fiscal year ends on December 31.
December 31, 2007
Revenue
Provided below is a summary of Revenue as compiled by Zacks Research Digest:
|Revenue (In $ M) |
|Positive |0.0% |
|Neutral |89.5% |
|Negative |10.5% |
|Avg. Target Price |$7.01↓ |
|Maximum Target Price |$8.00 |
|Minimum Target Price |$5.30 |
|No of Analysts with Target Price/Total |13/19 |
According to analysts, risks that may impede the target price and ratings include loss of customer’s business due to product obsolesce, high customer concentration, integration risk, competition from Asian ODM/EMS providers, slowdown in end markets and reduced consumer spending.
Metrics detailing current management effectiveness are as follows:
|Metrics |Company |Industry |S&P 500 |
|Return on Assets (ROA) |-1.3% |6.5% |8.9% |
|Return on Investment (ROI) |-2.1% |8.9% |12.9% |
|Return on Equity (ROE) |-2.9% |17.5% |21.9% |
ROA, ROI, and ROE of (1.3%), (2.1%), and (2.9%) are lower than the market averages (as measured by S&P 500) of 8.9%, 12.9% and 21.9%, respectively.
For more details please see the Valuation tab of the CLS spreadsheet.
Capital Structure/Solvency/Cash Flow/Governance/Other
Balance Sheet
At the end of the third quarter, cash and cash equivalents increased to $953.1 million. Inventory decreased by $28.0 million q/q to $926.9 million. Inventory turns increased to 8.3x from 7.3x in 2Q07. Accounts receivable increased by $23.7 million q/q to $963.6 million, while DSOs decreased to 41.7 days in 3Q07 from 41.9 days in 2Q07. Long term debt stood at $746.7 million during the quarter.
Cash Flow
3Q07 cash flow from operations stood at $217.8 million. Capital expenditure was approximately $12.7 million during the quarter. Free cash flow was approximately $206.0 million in the quarter.
Manufacturing Partner
CLS was selected by Thales to manufacture products for the Boeing 787 aircraft in support of the Thales TopSeries In-flight Entertainment system. Under the expanded agreement, Celestica will participate as part of the new product introduction team, and ultimately, provide fully tested new video displays and electronic boxes to Thales. These components are part of Thales’s cabin system for the Boeing 787 Dreamliner aircraft. Production is scheduled to begin in the fourth quarter of 2007.
December 31, 2007
Potentially Severe Problems
None other than those discussed in other sections of this report.
December 31, 2007
Long-Term Growth
Zacks Digest long-term growth rates range from 10.0% (Bear Stearns) to 25.0% (Merrill), with an average of 15.8%. According to analysts, CLS plans to generate growth through incremental outsourcing (with both new and existing customers), additional service offerings (primarily within design, configuration, fulfillment, and supply chain management), and acquisitions in the consolidating EMS industry.
Most analysts believe once CLS completes the realignment of its global footprint, it will be well- positioned to benefit from the secular outsourcing trend and win a greater share of new business. One firm (CIBC) believes the long-term growth and profitability of the Company will be dependent on the Company’s ability to implement its restructuring program and improve margins, while growing the topline.
December 31, 2007
Upcoming Events
On January 31, 2008, CLS is expected to release its 4Q07 earnings.
Individual Analyst Opinions
POSITIVE RATINGS (0.0%)
None
NEUTRAL RATINGS (89.5%)
BMO Cap. – Market Perform (Target Price – $8.00) – (11/29/07): The analyst has reiterated a Market Perform rating on the stock and the price target of $8.00 per share. INVESTMENT SUMMARY: Though the analyst was encouraged by the Company’s 3Q07 performance, it prefers to remain on the sidelines due to low revenue visibility and unclear industry fundamentals.
Genuity – Hold (Target Price – $7.50) – (10/26/07): The analyst has retained a Hold rating on the stock, but increased the target price from $7.00 to $7.50. INVESTMENT SUMMARY: The analyst remains concerned about the economic conditions in 2008. Further, it does not see any important catalyst that will drive the stock higher in the near term. Hence, it prefers to remain on the sidelines.
Kintisheff – Hold (Target Price – $6.50) – (11/09/07): The analyst has upgraded the stock from a Sell rating to a Hold rating, and increased the target price from $4.00 to $6.50.
Longbow – Neutral – (10/26/07): The analyst has reaffirmed a Neutral rating on the stock. INVESTMENT SUMMARY: The analyst believes that unless the Company achieves sustained progress in both sales and earnings, any upside to the stock will be limited.
B. of America – Neutral (Target Price – $7.00) – (12/27/07): The analyst has maintained a Neutral rating on the stock and the target price of $7.00 per share. INVESTMENT SUMMARY: The analyst remains cautious on the stock based on customer and execution risk, weak revenue and lack of continued margin growth. Further, it expects limited upside to estimates in the near term.
CIBC – Sector Performer (Target Price – $7.00) – (10/25/07): The analyst has reiterated a Sector Performer rating on the stock with a target price of $7.00 per share. INVESTMENT SUMMARY: The analyst believes that the shares are fairly valued at the current levels, owing to lower revenue, uncertain end markets, and further delays in operating leverage.
Citigroup – Hold (Target Price – $7.50) – (10/26/07): The analyst has maintained a Hold rating on the stock, but increased the target price from $7.00 to $7.50 per share. INVESTMENT SUMMARY: Although the analyst believes that the Company has made decent progress with its Mexico operations, it prefers to remain on the sidelines until there is stronger sales volume and increased profitability.
Cowen – Neutral – (10/26/07): The analyst has reiterated a Neutral rating on the stock. INVESTMENT SUMMARY: The firm opines investors should wait for more visibility before becoming positive on the stock.
Deutsche Bank – Hold (Target Price – $6.00) – (12/18/07): The analyst has resumed coverage on the stock with a Hold rating and a target price of $6.00 per share. INVESTMENT SUMMARY: The firm remains concerned about the slowing macroeconomic conditions and the Company’s focus on the slower growing core EMS verticals, and hence, prefers to remain on the sidelines.
J.P. Morgan – Neutral – (12/17/07): The firm has maintained a Neutral rating on the stock. INVESTMENT SUMMARY: The analyst remains encouraged by the Company’s 3Q07 results, but would wait for consistent revenue and earnings improvement before getting more constructive on the stock.
Jefferies – Hold (Target Price – $6.75) – (10/26/07): The analyst has retained a Hold rating on the stock, but increased the target price from $6.25 to $6.75 per share. INVESTMENT SUMMARY: The analyst remains cautious on the stock, owing to limited sales growth, challenged profit metrics, market share losses and inconsistent performance.
Lehman – Equal Weight (Target Price – $7.00) – (10/26/07): The analyst has maintained an Equal Weight rating on the stock, but increased the target price from $6.50 to $7.00 per share. INVESTMENT SUMMARY: The analyst believes that the Company’s margin improvement is not sufficient for the stock to appreciate in the near term. Hence, the analyst prefers to remain on the sidelines until there is a sustained growth in sales and a steady demand environment.
Merrill – Neutral (10/25/07): The analyst has reiterated a Neutral rating on the stock. INVESTMENT SUMMARY: The analyst believes that the upside to estimates would be limited in the near term. Further, it prefers to remain on the sidelines due to limited visibility in new wins as well as uncertain end market demand.
Raymond James – Market Perform (10/26/07): The analyst has maintained a Market Perform rating on the stock. INVESTMENT SUMMARY: The analyst believes that consistent revenue growth would be an important catalyst for the stock. For the time being, it prefers to remain on the sidelines due to limited near term visibility.
RBC Cap. – Sector Perform (Target price – $7.00) – (10/26/07): The analyst has retained a Sector Perform rating on the stock, but increased the target price from $6.00 to $7.00 per share.
ScotiaCap. – Sector Perform (Target Price – $7.55) – (10/26/07): The analyst has reaffirmed a Sector Perform rating on the stock, but increased the target price from $6.38 to $7.55 per share. INVESTMENT SUMMARY: The analyst believes that the upside potential for the shares will be limited until there is a stronger topline growth along with sustained revenue growth.
Thomas Weisel – Market Weight (Target Price – $8.00) – (10/25/07): The analyst has maintained a Market Weight rating on the stock and established a target price of $8.00 per share. INVESTMENT SUMMARY: The analyst believes that the shares are fairly valued at the current levels. The firm would like to see continued progress in Mexico and Europe as well as better evidence of new business momentum before becoming positive on the stock.
NEGATIVE RATINGS (10.5%)
Bear Stearns – Underperform – (11/01/07): The analyst has maintained an Underperform rating on the stock.
Goldman – Sell – (Target Price – $5.30) – (12/19/07): The analyst has maintained a Sell rating on the stock, but increased the price target from $5.20 to $5.30.
DROPPED COVERAGE
American Technology – (10/29/07): The analyst has dropped coverage on the stock, owing to a strategic re-alignment of coverage priorities.
GMP Sec. – (11/02/07): The firm has dropped coverage on the stock due to the departure of the analyst.
MorganStanley – (08/21/07): The analyst has dropped coverage on the stock.
UnionBankSwitz. – (11/30/07): The firm has dropped coverage on the stock due to the departure of the analyst.
Research Associate: Harpreet Sandhu
Copy Editor: Oindrila Banerjee
Content Ed.: Payal Jalan
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December 31, 2007
Research Associate: Harpreet Sandhu, MBA.
Editor: Payal Jalan, M. Fin.
Sr. Editor: Ian Madsen, CFA; imadsen@; 1-800-767-3771x9417
111N Canal Street, Suite 1101 [pic] Chicago, IL 60606
Zacks Research Digest
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