There are a couple of reasons why FLEX receives a valuation premium in comparison with Celestica.
1. Sector Value Criteria: The top companies in this sector are compared based on operating margins, geographical manufacturing diversity, client industry diversity, client concentration, and, to a lesser extent (among the top 5-6), financial strength.
At the moment, FLEX has better op/m, industry diversity, and, quite possibly, client concentration (i.e., less). I think FLEX also has better geographical capacity. CLS is improving on all counts but it is not in parity with FLEX. It may never reach parity. The important thing is that management clearly is moving to improved valuation. As examples, CLS is picking up new telecom business to go with its computer hardware manuf capacity. Management wants to add capacity in E.Europe and Latin America (Brazil) this year. Management also is making progress towards improving margins. If it continues to do all of theses things, it should be rewarded with expanding multiples.
2. Market Liquidity (Ability to buy/sell the shares in large quantities): A second reason is the relatively low float in the U.S. The smaller number of shares discourages institutional ownership (and hence attention from the "street"). In the most recent secondary, the majority of the shares were not placed with US institutions but rather retail investors and in Canada. As CLS grows, if it continues to perform, it will issue more shares in the U.S. and become more attractive to U.S. institutions. It does not help that CLS is a Canadian company either. Among other minor stigmas is its accounting treatment on a cash basis rather than earnings.
There may be other reasons but these are the first two to come to mind. What is important to me is managements progress in closing the gap on valuation differences. The market is saying "continue to show me." It also is true that SANM, SLR, FLEX, and JBL recently have been the subject of various strong buy or buy coverage initiations or reiterations. That in no small part explains the recent relative performance of CLS. |
