Wall Street Analysts Think Celestica (CLS) Is a Good Investment: Is It?

Celestica (CLS) has been one of the most searched-for stocks on Zacks.com lately. So, you might want to look at some of the facts that could shape the stock's performance in the near term.

Over the past month, shares of this electronics manufacturing services company have returned +34%, compared to the Zacks S&P 500 composite's +3.3% change. During this period, the Zacks Electronics - Manufacturing Services industry, which Celestica falls in, has gained 18.6%. The key question now is: What could be the stock's future direction?

Although media reports or rumors about a significant change in a company's business prospects usually cause its stock to trend and lead to an immediate price change, there are always certain fundamental factors that ultimately drive the buy-and-hold decision.

Revisions to Earnings Estimates

Rather than focusing on anything else, we at Zacks prioritize evaluating the change in a company's earnings projection. This is because we believe the fair value for its stock is determined by the present value of its future stream of earnings.

Our analysis is essentially based on how sell-side analysts covering the stock are revising their earnings estimates to take the latest business trends into account. When earnings estimates for a company go up, the fair value for its stock goes up as well. And when a stock's fair value is higher than its current market price, investors tend to buy the stock, resulting in its price moving upward. Because of this, empirical studies indicate a strong correlation between trends in earnings estimate revisions and short-term stock price movements.

For the current quarter, Celestica is expected to post earnings of $1.04 per share, indicating a change of +36.8% from the year-ago quarter. The Zacks Consensus Estimate has changed +8.7% over the last 30 days.

The consensus earnings estimate of $3.85 for the current fiscal year indicates a year-over-year change of +58.4%. This estimate has changed +6.7% over the last 30 days.

For the next fiscal year, the consensus earnings estimate of $4.44 indicates a change of +15.3% from what Celestica is expected to report a year ago. Over the past month, the estimate has changed +11.2%.

Having a strong externally audited track record, our proprietary stock rating tool, the Zacks Rank, offers a more conclusive picture of a stock's price direction in the near term, since it effectively harnesses the power of earnings estimate revisions. Due to the size of the recent change in the consensus estimate, along with three other factors related to earnings estimates, Celestica is rated Zacks Rank #1 (Strong Buy).

The chart below shows the evolution of the company's forward 12-month consensus EPS estimate:

12 Month EPS

Revenue Growth Forecast

Even though a company's earnings growth is arguably the best indicator of its financial health, nothing much happens if it cannot raise its revenues. It's almost impossible for a company to grow its earnings without growing its revenue for long periods. Therefore, knowing a company's potential revenue growth is crucial.

In the case of Celestica, the consensus sales estimate of $2.5 billion for the current quarter points to a year-over-year change of +16.7%. The $9.6 billion and $10.42 billion estimates for the current and next fiscal years indicate changes of +20.6% and +8.5%, respectively.

Last Reported Results and Surprise History

Celestica reported revenues of $2.5 billion in the last reported quarter, representing a year-over-year change of +22.3%. EPS of $1.04 for the same period compares with $0.65 a year ago.

Compared to the Zacks Consensus Estimate of $2.41 billion, the reported revenues represent a surprise of +3.66%. The EPS surprise was +10.64%.

The company beat consensus EPS estimates in each of the trailing four quarters. The company topped consensus revenue estimates each time over this period.

Valuation

No investment decision can be efficient without considering a stock's valuation. Whether a stock's current price rightly reflects the intrinsic value of the underlying business and the company's growth prospects is an essential determinant of its future price performance.

While comparing the current values of a company's valuation multiples, such as price-to-earnings (P/E), price-to-sales (P/S) and price-to-cash flow (P/CF), with its own historical values helps determine whether its stock is fairly valued, overvalued, or undervalued, comparing the company relative to its peers on these parameters gives a good sense of the reasonability of the stock's price.

As part of the Zacks Style Scores system, the Zacks Value Style Score (which evaluates both traditional and unconventional valuation metrics) organizes stocks into five groups ranging from A to F (A is better than B; B is better than C; and so on), making it helpful in identifying whether a stock is overvalued, rightly valued, or temporarily undervalued.

Celestica is graded B on this front, indicating that it is trading at a discount to its peers. Click here to see the values of some of the valuation metrics that have driven this grade.

Conclusion

The facts discussed here and much other information on Zacks.com might help determine whether or not it's worthwhile paying attention to the market buzz about Celestica. However, its Zacks Rank #1 does suggest that it may outperform the broader market in the near term.

Zacks Investment Research

Shares of Celestica (CLS) have been strong performers lately, with the stock up 36.1% over the past month. The stock hit a new 52-week high of $86.36 in the previous session. Celestica has gained 193.2% since the start of the year compared to the 31.4% move for the Zacks Computer and Technology sector and the 43.3% return for the Zacks Electronics - Manufacturing Services industry.

What's Driving the Outperformance?

The stock has a great record of positive earnings surprises, as it hasn't missed our earnings consensus estimate in any of the last four quarters. In its last earnings report on October 23, 2024, Celestica reported EPS of $1.04 versus consensus estimate of $0.94 while it beat the consensus revenue estimate by 3.66%.

For the current fiscal year, Celestica is expected to post earnings of $3.85 per share on $9.6 billion in revenues. This represents a 58.44% change in EPS on a 20.55% change in revenues. For the next fiscal year, the company is expected to earn $4.43 per share on $10.42 billion in revenues. This represents a year-over-year change of 15.32% and 8.52%, respectively.

Valuation Metrics

Celestica may be at a 52-week high right now, but what might the future hold for the stock? A key aspect of this question is taking a look at valuation metrics in order to determine if the company is due for a pullback from this level.

On this front, we can look at the Zacks Style Scores, as these give investors a variety of ways to comb through stocks (beyond looking at the Zacks Rank of a security). These styles are represented by grades running from A to F in the categories of Value, Growth, and Momentum, while there is a combined VGM Score as well. The idea behind the style scores is to help investors pick the most appropriate Zacks Rank stocks based on their individual investment style.

Celestica has a Value Score of B. The stock's Growth and Momentum Scores are B and F, respectively, giving the company a VGM Score of B.

In terms of its value breakdown, the stock currently trades at 22.3X current fiscal year EPS estimates, which is a premium to the peer industry average of 19X. On a trailing cash flow basis, the stock currently trades at 22.6X versus its peer group's average of 15.6X. This isn't enough to put the company in the top echelon of all stocks we cover from a value perspective.

Zacks Rank

We also need to look at the Zacks Rank for the stock, as this supersedes any trend on the style score front. Fortunately, Celestica currently has a Zacks Rank of #1 (Strong Buy) thanks to favorable earnings estimate revisions from covering analysts.

Since we recommend that investors select stocks carrying Zacks Rank of 1 (Strong Buy) or 2 (Buy) and Style Scores of A or B, it looks as if Celestica fits the bill. Thus, it seems as though Celestica shares could still be poised for more gains ahead.

How Does CLS Stack Up to the Competition?

Shares of CLS have been soaring, and the company still appears to be a decent choice, but what about the rest of the industry? One industry peer that looks good is Plexus Corp. (PLXS). PLXS has a Zacks Rank of # 1 (Strong Buy) and a Value Score of B, a Growth Score of B, and a Momentum Score of D.

Earnings were strong last quarter. Plexus Corp. beat our consensus estimate by 20.92%, and for the current fiscal year, PLXS is expected to post earnings of $6.81 per share on revenue of $4.23 billion.

Shares of Plexus Corp. have gained 21.2% over the past month, and currently trade at a forward P/E of 24.37X and a P/CF of 19.82X.

The Electronics - Manufacturing Services industry is in the top 5% of all the industries we have in our universe, so it looks like there are some nice tailwinds for CLS and PLXS, even beyond their own solid fundamental situation.

Zacks Investment Research

Growth investors focus on stocks that are seeing above-average financial growth, as this feature helps these securities garner the market's attention and deliver solid returns. But finding a great growth stock is not easy at all.

That's because, these stocks usually carry above-average risk and volatility. In fact, betting on a stock for which the growth story is actually over or nearing its end could lead to significant loss.

However, it's pretty easy to find cutting-edge growth stocks with the help of the Zacks Growth Style Score (part of the Zacks Style Scores system), which looks beyond the traditional growth attributes to analyze a company's real growth prospects.

Our proprietary system currently recommends Celestica (CLS) as one such stock. This company not only has a favorable Growth Score, but also carries a top Zacks Rank.

Research shows that stocks carrying the best growth features consistently beat the market. And for stocks that have a combination of a Growth Score of A or B and a Zacks Rank #1 (Strong Buy) or 2 (Buy), returns are even better.

Here are three of the most important factors that make the stock of this electronics manufacturing services company a great growth pick right now.

Earnings Growth

Arguably nothing is more important than earnings growth, as surging profit levels is what most investors are after. For growth investors, double-digit earnings growth is highly preferable, as it is often perceived as an indication of strong prospects (and stock price gains) for the company under consideration.

While the historical EPS growth rate for Celestica is 47.7%, investors should actually focus on the projected growth. The company's EPS is expected to grow 58.2% this year, crushing the industry average, which calls for EPS growth of 16.8%.

Cash Flow Growth

While cash is the lifeblood of any business, higher-than-average cash flow growth is more important and beneficial for growth-oriented companies than for mature companies. That's because, growth in cash flow enables these companies to expand their businesses without depending on expensive outside funds.

Right now, year-over-year cash flow growth for Celestica is 19.4%, which is higher than many of its peers. In fact, the rate compares to the industry average of -0.2%.

While investors should actually consider the current cash flow growth, it's worth taking a look at the historical rate too for putting the current reading into proper perspective. The company's annualized cash flow growth rate has been 19.2% over the past 3-5 years versus the industry average of 9.2%.

Promising Earnings Estimate Revisions

Superiority of a stock in terms of the metrics outlined above can be further validated by looking at the trend in earnings estimate revisions. A positive trend is of course favorable here. Empirical research shows that there is a strong correlation between trends in earnings estimate revisions and near-term stock price movements.

The current-year earnings estimates for Celestica have been revising upward. The Zacks Consensus Estimate for the current year has surged 6.7% over the past month.

Bottom Line

While the overall earnings estimate revisions have made Celestica a Zacks Rank #1 stock, it has earned itself a Growth Score of B based on a number of factors, including the ones discussed above.

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

This combination indicates that Celestica is a potential outperformer and a solid choice for growth investors.

Zacks Investment Research

Celestica Inc. CLS has gained a phenomenal 191.4% over the past year compared with the industry’s growth of 30.7%. It has also outperformed peers like Flex Ltd. FLEX and Jabil Inc. JBL over this period.

With more than 25 years of experience in manufacturing backed by a simplified and optimized global network, Celestica is committed to delivering next-generation, cloud-optimized data storage and industry-leading networking solutions to help customers balance performance, power efficiency and space as technologies evolve. It boasts a diverse portfolio of products that are integral to AI (artificial intelligence) applications.

One-Year Price Performance

CLS Rides on Portfolio Strength

Celestia has benefited from the ongoing generative AI boom, thanks to the solid demand trends for AI/ML (machine learning) compute and networking products from hyperscale customers. In addition to the high-performance 800G family of network switches (which are vital for data centers that power AI applications) and storage solutions like the SC6100 controller and SD6200 platform (which provide efficient and scalable data storage for AI), Celestia offers Photonic Fabric – an optical compute and memory fabric solution capable of supercharging AI infrastructure. This transformational solution provides a foundational technology to advance AI while maintaining scalable, sustainable and profitable business models.

By integrating next-generation networking products with silicon photonics packaging solutions, Celestica aims to optimize supply chain solutions to reduce time to market. The data center switches combined with optical transceivers have the potential to handle and sustain high volumes of both inbound and outbound network traffic and cater to the demand for data center bandwidth for supporting AI/ML and data analytics applications.

Celestica recently launched DS4100 – a 1U 800G per port top-of-rack, leaf/spine switch – to cater to the high-bandwidth demands of data center networking across the enterprise, service provider and cloud provider domains. Designed with Broadcom Inc. AVGO TH4-12.8T switch chipset, the latest addition to the Hardware Platform Solutions portfolio will help Celestica offer a comprehensive 800G data center switch lineup for demanding applications with the redundancy and flexibility required of modern data centers. Such state-of-the-art portfolio additions have helped the company to record healthy top-line growth over the past few years.

CLS Expands Production Capabilities

With the proliferation of AI-based applications and generative AI tools, business enterprises are being increasingly forced to scale future computing platforms to address the burgeoning AI workloads with low-power, high-bandwidth data transfer. This, in turn, is leading to an exponential growth in I/O bandwidth.

To strengthen its market-leading position of AI-enabled products, Celestia is currently developing more than 100,000 square feet of additional capacity in Thailand. Moreover, it is adding 80,000 square feet of incremental capacity in Malaysia to augment its production capabilities. Celestia is also working with industry leaders to commercialize technologies such as On-Board Optics and Co-Packaged Optics to address the demand for speed and cost-efficiency amid the evolving technology landscape.

Estimate Revision Trend

Earnings estimates for Celestia for 2024 have moved up 40.5% to $3.85 over the past year, while the same for 2025 has improved 32.6% to $4.43. The positive estimate revision depicts optimism about the stock’s growth potential.

End Note

As the company scales up production volumes and costs go down, possible uses for silicon photonics are likely to soar across several industries, including automotive, data center and high-performance computing, telecommunications, medical, aerospace and defense.

The stock delivered a trailing four-quarter average earnings surprise of 13.2%. It has a VGM Score of A. Celestia currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Riding on a robust earnings surprise history and favorable Zacks Rank, it appears primed for further stock price appreciation. Consequently, investors are likely to profit if they bet on this high-flying stock now.

Zacks Investment Research

Top Wall Street analysts changed their outlook on these top names. For a complete view of all analyst rating changes, including upgrades and downgrades, please see our analyst ratings page.

• Barclays analyst George Wang initiated coverage on Celestica Inc. with an Overweight rating and announced a price target of $91. Celestica shares closed at $72.32 on Monday. See how other analysts view this stock.
• JP Morgan analyst Tessa Romero initiated coverage on Upstream Bio, Inc. U with an Overweight rating and announced a price target of $38. Upstream Bio shares closed at $25.15 on Monday. See how other analysts view this stock.
• William Blair analyst Margaret Kaczor initiated coverage on CeriBell, Inc. C with an Outperform rating. CeriBell shares closed at $26.24 on Monday. See how other analysts view this stock.
• Jefferies analyst Julien Dumoulin-Smith initiated coverage on CMS Energy Corporation with a Buy rating and announced a price target of $76. CMS Energy shares closed at $68.39 on Monday. See how other analysts view this stock.
• Bernstein analyst Chad Dillard initiated coverage on Eaton Corporation plc with an Outperform rating and announced a price target of $382. Eaton shares closed at $331.13 on Monday. See how other analysts view this stock.

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