With the market marching higher and higher, I find myself attempting to expand my circle of competence. I also want to keep an arsenal of companies I would buy on a pull-back. I started looking at Celestica (CLS on TSX and NYSE).
CLS is decent sized player in the EMS (electronics manufacturing services) for OEMs. End users are primarily enterprise communications, servers and industrial. Supply chains reach around the globe and the company aims to provide a very wide range of services with the lowest TCOO (total cost of ownership).
My previous research tells me that most (if not all) EMS manufacturers are price takers and need to focus on operational excellence to increase their value proposition to customers and increase the chance of surviving longer term disruptions in the industry.
CLS has a page on their website that focuses on operational excellence and continuous improvement. Though I can’t decipher if they practice what they preach through the internet, but at least it’s something.
Here is a look at ttm margins.
As you can see we have some pretty thin margins, but they don’t tell the entire story. Here are some additional metrics to judge the business.
To be fair, I have removed the restructuring charges. These are mostly associated with the shutdown of operations associated with RIM. Some of these restructuring charges required a cash outlay so it may not be fair to completely eliminate them, but I need to get an idea of what the core business can do. The restructuring charges should conclude in the next 2 quarters.
As you can see we have a company that earn 20% pretax ROC, that’s pretty good. Another positive is that the CCC and asset turn has been steady or improving.
Here is what the historical valuation looks like…
As you can see outside of the recent (Great) recession, valuation is near the low end of its range. For the record, I am leary of using valuation based upon earnings given the cyclical nature of the business.
Easily comparable peers (JBL, FLEX, BHE and SANM) trade at slightly higher multiples and haven’t had to deal with RIM. So we are cheap relative to peers and cheap on an absolute basis.
As usual, I am not an expert in the company or industry so position sizes would need to be limited.
As mentioned these are price takers, so if CLS can’t keep focusing on waste elimination in their production and supply chain competitors can catch up. There may also be an extended slow down in their markets.
There is enough customer concentration to be concerned with at least 10% of revenue coming from one customer.
The company has operations all over the world and is exposed to currency fluctuations.
There is a lawsuit outstanding against the former CEO and CFO.
Outside what has been previously highlighted, the CEO does own several years worth of his compensation in shares. The company does have a compensation plan that focuses on profitability more than top line growth.
An additional positive is the recent issuer bid. This essentially erased 12% of the shares outstanding. It was a big vote of confidence for me and I think should have set the floor.
Though I am not buying at this time, if CLS gets to my trigger of $7.40 I will revisit. I am concerned about a wider slowdown and the company has been guiding down on top line numbers, so my valuation may not provide enough margin of safety. They are positive on H2 2013.
I am also concerned that the restructuring charges continue to linger and are higher than originally anticipated.
I would love to hear any opinions my readers (hi Mom) have on CLS.
Disclosure: The author has no position in CLS.