Celestica’s transition to more profitable lines was disrupted by the global slowdown in semiconductor sales that began midway through last year.
While Canada can currently lay claim to the continent’s best performing tech stock in Shopify Inc., the single worst performer of the year also makes its home on the Toronto Stock Exchange.
Celestica Inc. has had a very bad run.
Lost contracts, a slowdown in the semiconductor business, and a string of disappointing quarterly results have dragged the Toronto-based manufacturer of electronic parts down to the very bottom of the rankings of the Information Technology sectors of the S&P/TSX Composite Index and the S&P 500 index.
Down by 17 per cent since the start of the year, Celestica’s shares hit their lowest level in nearly six years last week. From its peak roughly two years ago, the stock has declined by 50 per cent, a period of time that has seen the average tech listing in Canada and the United States rise by more than 40 per cent.
The last straw for the analyst community came in late April, when Celestica not only fell considerably short of the Street’s first-quarter profit forecast, it also missed its own revenue guidance.
The remaining holdouts all downgraded Celestica’s shares, leaving it with zero buy ratings among the 12 analysts following the company.
“It's just a lack of execution,” said Peter Hodson, founder of 5i Research Inc. “The stock gets cheaper and cheaper, because nobody's got any reliability in terms of what their forecasts are.”
With 2019 shaping up to be a lost year in Celestica’s turnaround effort, it’s hard to see the company’s or the stock’s fortunes reversing any time soon, Mr. Hodson said.
What’s particularly frustrating for Celestica shareholders is that the company is well-suited – at least in theory – to the current economic conditions.
Its core business involves supplying components for companies such as Cisco Systems Inc., which typically rely more heavily on third-party manufacturers during periods of increased demand, such as in the burgeoning later stages of the economic cycle.
A good precedent for such a phase was 1999-2000, prior to the bursting of the dot-com bubble, which were boom times for Celestica.
The company’s valuation hit a lofty $20-billion, making it a prize holding of the Onex Corp. empire, which remains a controlling shareholder. (Celestica’s current market capitalization is $1.3-billion.)
What followed was nearly a decade of losses, cuts and restructurings for the company, culminating in the global financial crisis.
As the global economy subsequently began to recuperate, a surplus of factory capacity meant there was limited need for third-party manufacturers.
The decline and fall of BlackBerry Ltd.’s handset business also meant the loss of Celestica’s largest customer in 2012.
Then, around 2015, the company showed signs of a revival. It expanded beyond communications equipment into components for the aerospace, health care and renewable energy industries, which generally feature higher margins and longer product cycles.
But the company’s legacy business still accounts for about two-thirds of revenue. And the communications hardware business is one of intense price competition and very low margins, said Robert Young, an analyst at Canaccord Genuity.
“It’s a tougher world for hardware just because everything is shifting into software and going into the cloud,” Mr. Young said.
Celestica’s transition to more profitable lines, meanwhile, was disrupted by the global slowdown in semiconductor sales that began midway through last year.
Aggressive margin improvement targets were not met, said Mr. Young, who downgraded the stock when Celestica missed first-quarter earnings by 26 per cent.
“You never want to be in that situation – downgrading when the stock is low,” he said. “But I don’t think the stock is going anywhere until they can show execution against those margin targets.”
The company’s management said it expects to hit those targets in the first half of 2020 and is chalking 2019 up as a “rebuilding year,” chief executive Rob Mionis said on the first-quarter earnings call.
The latest earnings miss – Celestica’s third in a row – resulted in the stock declining by 16 per cent in one day, which was partly fuelled by the company failing to meet even its own revenue and earnings estimates, Mr. Hodson said.
That makes it difficult to even consider the stock as a contrarian play based on the absence of analyst support, Mr. Hodson said.
“With a name like this, we’d rather pay more for it once there’s a confirmation of improvement.”
Tim Shufelt