On today’s Breakouts report, there are just four stocks on the positive breakouts list (stocks with positive price momentum), and 165 stocks are on the negative breakouts list (stocks with negative price momentum).
Highlighted today is the top-performing stock in the S&P/TSX Composite Index in 2023 list - Celestica Inc. (CLS-T). Celestica was one of the few stocks to rally on Monday and appear on the positive breakouts. Year-to-date, the share price has rallied 118 per cent. Given this astounding move higher, the stock is trading at a forward price-to-earnings multiple that is approaching its seven-year historical high and from a technical analysis perspective, the stock is nearing an overbought condition.
A brief outline on Celestica is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Toronto-based Celestica defines itself as a “multinational design, manufacturing, hardware platform and supply chain electronics manufacturing services company.” The company has two reporting segments: Advanced Technology Solutions (ATS) and Connectivity & Cloud Solutions (CCS).
The stock is dual-listed, trading on the Toronto Stock Exchange and New York Stock Exchange under the same ticker, CLS.
Investment thesis
- Canadian company that stands to benefit from artificial intelligence adoption and expansion.
- Strong earnings growth. In 2022, adjusted earnings per share increased 46 per cent year-over-year.
- Rising free cash flow. In 2023, management expects to deliver US$125-million of adjusted free cash flow, up from US$94-million reported in 2022.
- Diversified revenue stream. Serving aerospace and defence, industrial, healthtech and capital equipment markets.
- Key near-term risks to consider: 1) valuation is approaching peak levels (approaching its seven-year historical high on a forward price-to-earnings basis). 2) nearing a technically overbought condition.
Dividend policy
The company does not pay its shareholders a dividend.
Quarterly earnings and outlook
After the market closed on July 26, the company reported better-than-expected second-quarter financial results and raised it 2023 earnings outlook, which sent the share price soaring.
Adjusted earnings per share came in at 55 US cents, ahead of the consensus estimate of 47.5 US cents and up from 44 US cents reported during the same period last year. For the third-quarter, management anticipates adjusted earnings per share will be between 56 US cents and 62 US cents. For 2023, management expects adjusted earnings per share to come in at US$2.25, up from its prior guidance of between US$2 and US$2.05.
The following day, the share price rallied 9 per cent on high volume.
On the earnings call, president and chief executive officer Rob Mionis provided a solid outlook, “Following a strong financial performance in the second quarter, we are pleased to raise our annual outlook for 2023. Our revenue outlook for the year is now at least $7.85 billion, which if achieved, would represent growth of at least 8 per cent and our highest revenue level since 2007. Our outlook for 2023 non-IFRS adjusted EPS [earnings per share] is now raised to $2.25. If achieved, this would represent 18 per cent growth compared to the prior year. We anticipate non-IFRS operating margin of 5.5 per cent for 2023, which would represent an increase of 60 basis points from 2022. As we look forward to 2024, we expect revenue growth across each of our businesses supported by anticipated strong secular tailwinds and new program wins. We believe that this growth with continuing margin strength will lead to non-IFRS adjusted EPS growth of 10 per cent or more in 2024 relative to our 2023 outlook.”
He also commented on the company’s AI driven growth potential, “Our current outlook calls for our HPS [Hardware Platform Solutions] business to resume year-to-year growth in 2024 as new programs ramp. Our total portfolio of businesses within hyperscaler customers remains very healthy as they are continuing to make significant investments in their AI and machine learning capacity and capabilities. We have been a key partner for our hyperscaler customers as they have worked to build out their data center infrastructure. Hyperscalers now represent approximately $2.5 billion of revenue over the past 12 months for Celestica, having grown at approximately a 50 per cent CAGR [compound annual growth rate] since 2018. Recent hyperscaler demand has skewed towards proprietary compute products. Moving forward, we anticipate hyperscalers ongoing deployment of AI and machine learning infrastructure will accelerate their networking refresh cycle. As they are expected to need more advanced networking infrastructure to support their investments in computing capacity. As a result, we anticipate demand for our HPS products and services to increase in future periods.”
Analysts’ recommendations
After the company released its quarterly earnings results on July 26, seven analysts issued research reports. Six were “buy” recommendations, while Stifel’s Matt Sheerin maintained a “hold” recommendation.
The firms providing recent research coverage on the company are: Argus Research Company, BMO Nesbitt Burns, Canaccord Genuity, CIBC World Markets, RBC Capital Markets, Stifel and TD Securities.
Revised recommendations
After the company reported better-than-expected quarterly earnings results in July, seven analysts revised their expectations – all significantly higher.
- CIBC’s Todd Coupland upgraded his recommendation to an “outperform” from “neutral” and increased his target price to US$25 from US$14.
- RBC’s Maxim Matushansky upgraded his recommendation to an “outperform” from a “sector perform” and raised his target price to US$22 from US$14.
- Stifel’s Matt Sheerin has bumped his target price twice since the earnings release with his current target price set at U.S. $24 up from U.S. $14 prior to the earnings release.
- TD’s Daniel Chan upgraded his recommendation to a “buy” from a “hold” and lifted his target price to US$23 from US$14.50.
- Argus’ Kristina Ruggeri raised her target to US$26 (the high on the Street) from US$15.
- BMO’s Thanos Moschopoulos revised his target price to US$22 from U.S. $14.50.
- Canaccord’s Robert Young hiked his target to US$24 from US$16.
Financial forecasts
The Street is forecasting earnings per share of US$2.27 in 2023, up from US$1.90 reported in 2022, and US$2.51 in 2024.
Earnings forecasts have been climbing. Three months ago, the consensus earnings per share estimates were US$2.04 for 2023 and US$2.24 for 2024.
Valuation
The stock is trading at a price-to-earnings multiple of 9.7 times the 2024 consensus estimate, which is above its seven-year historical average forward P/E multiple of 7.7 times and near its peak multiple of just under 11 times during this time period.
The average one-year target price is US$23.71, implying the share price is fully valued.
Insider transaction history
In the third quarter, one insider reported trading activity in the public market.
On Aug. 4, chief strategy officer Alok Agrawal sold 12,367 shares at a price per share of US$21.11, reducing this particular account’s position to 37,747 shares. Proceeds from the sale exceeded US$261,000, excluding trading fees.
Chart watch
Year-to-date, the share price has rallied 118 per cent, making it the best performing stock in the S&P/TSX Composite Index. The share price trading at its highest level since 2002. Given this stellar performance, the stock is approaching an overbought level with a relative strength index (RSI) reading of 69. Generally, an RSI reading at or above 70 reflects an overbought condition.
Looking at key technical resistance and support levels, shares of Celestica face a ceiling of resistance around $34. Looking at the downside, there is strong technical support around $30, near its 50-day moving average (at $29.35).
ESG Risk Rating
According to Sustainalytics, the company has an environmental, social and governance (ESG) risk score of 10.4 as of April 19. A risk score of between 10 and 20 reflects a “low risk” rating.
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at. This report should not be considered an investment recommendation.