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Technology Stocks : Celestica -- Ignore unavailable to you. Want to Upgrade?

To: Marc who wrote (214)	11/12/1999 10:18:00 PM
From: MGV	Read Replies (2) \| Respond to of 456

Stock of the Day Nov 12, 1999 Celestica: Celestial Stock Performer Celestica Inc. (NYSE:CLS - news) is the third largest Electronics Manufacturing Services company in the world. The EMS industry has been on fire lately as more and more high-tech companies outsource production to these contract manufacturers. Celestica's stock has rocketed from $10 to $71.75 since last September, and yesterday one analyst raised his price target to $105 on the stock. Manufacturing high-tech hardware and electronic components is a decidely unglamorous side of the tech world, yet it has certainly captured the fancy of Wall Street because of its tremendous growth and earnings visibility. Indeed, Celestica and other EMS firms are parked in front of the massive outsourcing trend that is sweeping across many fast-growing industries. Simply put, Celestica makes printed circuit boards and other electronic components for Original Equipment Manufacturers (OEMs) in the computer and communications/networking industries. These OEMs find it more efficient and cost-effective to let companies like Celestica handle the manufacturing of the electronic components, and in some cases the assembly and distribution of the final products. Product design, prototyping, testing and supply chain management also come under the broad range of services offered by Celestica. Celestica's list of customers reads like a who's who of top-tier tech companies including Lucent, Nortel Networks and Cisco in the networking business. Computer companies such as Sun Microsystems, IBM and Hewlett-Packard also use Celestica's services. Ironically, the Asian crisis that hit two years ago seems to have been a valuable catalyst for the Electronics Manufacturing Services industry. Celestica and other contract manufacturers picked up a lot of business then because technology companies needed to cut costs to offset lost revenues from Asia, and one way was to sell off manufacturing capacity and outsource production. That way OEMs are only paying for the production they need, turning fixed costs into variable ones. Celestica has been acquiring manufacturing operations for years now, and they continue to score some very big acquisitions that bring with them contracts to take over the manufacturing for the selling company. The market for outsourced high-tech manufacturing continues to grow at an estimated 25%+ pace. Many new tech firms simply develop technologies and hire someone else to do the manufacturing, but even well-established companies are selling their factories and embracing the idea of hiring specialists to produce certain components, or in some cases an entire product. The merits of outsourcing production are fairly obvious -- specialized contractors can do it cheaper, faster, in higher volume, and often with higher quality. It lets high-tech companies concentrate on design, marketing and distribution with an eye toward getting new products to market quickly and having the flexibility to respond to changing markets more rapidly. The short product cycles of the high-tech world mean individual companies would be left in the dust unless they continually invested huge sums into manufacturing processes. Celestica has made the capital investment and can spread the cost over all its accounts, so even the big established companies that already have factories find it is cheaper to contract out. Celestica has also established substantial production capacity around the globe, lowering distribution costs for companies that otherwise might have to build products in one or two plants and ship them all over the world. A few years ago, the contract manufacturing industry was largely confined to assembling circuit boards for the OEMs, but now customers are looking for help with design, quality assurance and even after-sales service. Celestica responded to this demand by acquiring smaller companies with expertise in these areas, making the company a "one-stop shop" solution. This trend is not only adding business, but giving a boost to the otherwise slim margins commonly associated with contract manufacturing. With sales of $4.6 billion in the past year, Celestica trails only Solectron (NYSE:SLR - news) and SCI Systems (NYSE:SCI - news) in terms of size among EMS companies. In its fiscal third quarter ended September 30, Celestica posted growth of 67% in revenues and 100% in net income. Earnings per share increased 54% to $0.37. Analysts forecast 59% EPS growth for all of 1999 and a 30% rate over the next five years. Growth is certainly an important reason why analysts like this stock so much, but they also appreciate the earnings visibility created by Celestica's long-term contracts. Despite this stock's dramatic price appreciation several analysts have raised their price target, one of whom was Bank of America analyst Paul Fox who just set the bullseye at $105. While contract manufacturing is not exactly a sexy high-margin business, it is in front of a powerful evolution in the technology sector. Celestica seems to be thriving in its role behind the scenes. - James Hale The Online Investor fnews.yahoo.com