Who Will Catch Celestica's Falling Star?
By ERIC C. FLEMING / Barrons Nov 3, 2003
SOMETIMES "SLOW and steady" doesn't win the race; it just ensures a last-place finish.
At A Glance
Celestica (CLS)
Stock Price: $14.25
52-Wk High: $20.29
52-Wk Low: $9.55
Market Cap: $3.2 billion
Earnings Est. (2003): $ ($0.11)
Forward P/E: n.a.
Projected Long-term EPS Growth: 20%
Projected EPS Growth ('04/'03): n.a.
Sales (2002): $8.3 billion
Div. Yield: n.a.
CEO: Eugene Polistuk
Headquarters: Toronto, Canada
Source: Thomson Financial/First Call, Celestica.com
Shares of contract electronics manufacturer Celestica have barely budged thus far this year, while its rivals' stocks have soared. Sanmina-SCI is up about 138% and Flextronics International has gained 73%.
What's the problem?
Cell phone demand has headed up again while the migration to laptops jumpstarted personal computer sales. That has helped contract manufacturers like Solectron, which has cut costs while growing its businesses and customer base.
But Celestica has dragged its feet on paring expenses by delaying moving operations to lower-cost areas like Asia. And the firm's reluctance to grow through acquisitions, as its peers did, has left it exposed to weak markets such as high-end computing and to struggling customers like Sun Microsystems.
"Celestica can't execute its way out of a paper bag," declares Barry Randall, manager of the First American Technology Fund, who says he's been selling shares of its stock recently. Celestica officials didn't return Barron's Online's calls by deadline.
Celestica is the fifth-largest contract manufacturer worldwide, with 4.3% market share in the first half of the year, down from 6.5% a year ago. It trails Flextronics, Solectron and Sanmina-SCI, which together had about one-quarter of sales, according to market research firm iSuppli.
Earlier this month, Celestica reported a wider-than-expected loss of four cents a share in its third quarter as sales fell 17% to $1.6 billion. Celestica also warned of earnings disappointments in its fourth quarter, too.
"That [Celestica] suffers losses as they grow revenue is troubling," says Jim Savage, analyst at Wells Fargo Securities.
Part of the problem is Europe, where Celestica continues to face tough price competition from the likes of Solectron. Celestica plans to cut 1,000 more jobs than the 1,200 (and two plant closures) it already has announced.
Easier said than done.
"It's very tough to lay people off in Europe," says Scot Robertson, analyst at Stanford Group.
Celestica's European operations, which comprise about a fifth of its sales, lose money amid weak demand. (The remaining sales are divided almost equally between the Americas and Asia.)
Robertson thinks Celestica won't finish cutting costs in Europe for at least another two to three quarters.
"[Celestica's] been slow in downsizing its high-cost areas," says Jeff Bloch, analyst at market research firm iSuppli.
While Jabil Circuit, Flextronics and Solectron already have migrated more than half their manufacturing square footage to low-cost areas like Asia, Celestica has moved only about 24%, says Robertson.
And although iSuppli projects that the worldwide market for contract manufacturing and design will more than double, to $250 billion, in 2007 from $117 billion last year, that doesn't guarantee profits for any one manufacturer.
Deutsche Bank Securities expects Celestica to have negative gross margins this year and in 2004, trailing rivals Jabil Circuit and Sanmina, whose margins are projected to be thin but at least in the black next year.
And as Taiwanese rivals like Han Hai Precision Industry, which displaced Celestica as number four in the industry, take share amid persistent overcapacity, it "doesn't lend itself to pricing power," says Mark Lucey, analyst at TD Newcrest.
Meanwhile, Sun, Cisco Systems, Lucent Technologies and IBM each probably accounted for 10% of Celestica's sales in the third quarter, and the ten largest customers represented nearly three-quarters of sales.
Communications represented about half of third-quarter sales; PCs, workstations and servers -- mostly high-end UNIX machines for IBM and Sun -- made up 28%, and storage and other revenue (for customers like EMC) comprised 23% of sales.
"Sun, Lucent and IBM...are not on the vital end of [technology demand], " says Randall.
Maybe that's why Celestica recently broke with tradition by acquiring Concord, Mass.-based Manufacturers' Services (MSL) for $275 million earlier this month.
That will put Celestica into the industrial and avionics markets and bolster its design business. But the proposed union also leaves it stuck with even more production facilities in higher-cost areas, like the U.S.
Yet Wall Street is bending over backward to give Celestica (which has posted a loss for three consecutive quarters) the benefit of the doubt.
Its shares trade at an eye-popping 95 times the 15 cents a share analysts expect it to earn in 2004 (the consensus expects a loss for this year -- See At a Glance). That's far above the median forward multiple of 29.7 times over the past five years, according to Thomson Baseline.
We, too, have put in some good words for Celestica recently (see Weekday Trader Extra, "Celestica Waiting for the Turn," June 11, 2003). That followed a hopeful look at the company two years before (see Weekday Trader, "Bulls Think Celestica Can Go to the Heavens," July 24, 2001).
Of course, Celestica has $1.2 billion, or $5.29 a share, in cash, a debt-to-capital ratio of 17% and has been buying back shares.
But that won't matter much if it the company continues to founder while its rivals gain. At that point, investors may ask: If Celestica can't succeed now, when will it?
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Celestica: A Heavenly Flameout?
By ERIC C. FLEMING / Barrons Nov 10, 2003
SOMETIMES "SLOW AND STEADY" DOESN'T WIN the race; it just ensures a last-place finish. That's what's happening at Celestica, a Toronto-based outfit that makes gear for other tech companies. Its shares have barely budged this year, while rivals' stocks have soared. Flextronics International has gained 73%, for example, and Sanmina-SCI is up about 138%.
And from the looks of it, Celestica's shares aren't about to start rising any time soon.
For one thing, Celestica isn't very active in cellphones and laptop computers, the hottest markets right now for contract tech manufacturers. Instead, the bulk of its revenue comes from building things like big servers and elaborate switching gear for Sun Microsystems, Cisco Systems, Lucent Technologies, IBM and others.
While rivals have expanded into faster-growing markets through acquisitions, Celestica has shied away from large deals. The company made a small move earlier this month, buying Concord, Mass.-based Manufacturers' Services for $275 million, but that deal has a clear downside: It saddles Celestica with more facilities in the high-cost U.S.
Indeed, the company has clearly lagged its rivals in shifting operations to lower-cost Asian markets. Only 28% of its operations are now based in low-cost markets, versus closer to 50% for many competitors.
The company's CEO, Eugene Polistuk, insists the share will rise over the next year. "We haven't been dragging our feet," he says.
Still, some investors are getting fed up. "Celestica can't execute its way out of a paper bag," declares Barry Randall, manager of the First American Technology Fund in Minneapolis, who says he's been selling shares of its stock recently.
It's not as if contract tech manufacturing is a dying business. With more tech companies embracing outsourcing, the worldwide market should more than double, to $250 billion, by 2007, says El Segundo, Calif.-based research firm iSuppli. But Celestica's share of the riches is sliding -- to 4.3% in the first half of this year, from 6.5% a year earlier. The company has slipped from No. 4 in the field to No. 5, following Flextronics, Solectron, Sanmina-SCI and Hon Hai Precision Industry (see Asian Trader).
Feeling Stronger: Strong government data on October payrolls added to the evidence that stocks have correctly anticipated an economic upturn. The Nasdaq Composite finished Friday at 1971, up 2% for the week.
The profit picture has been bleak too. Earlier this month Celestica reported a wider-than-expected loss of 4 cents a share in its third quarter as sales fell 17% to $1.6 billion -- the second quarterly loss in a row. Celestica also warned of a disappointing fourth quarter.
One big problem is Europe, where Celestica gets about one-fifth of its revenue but faces tough competition amid weak demand. The company plans to cut 1,000 more jobs in Europe, beyond the 1,200 it already has announced, but that could take at least another two or three quarters because of the restrictions of European labor laws, says Scot Robertson, an analyst at the Stanford Group.
Investors, however, still have high hopes for Celestica -- probably too high. At a recent 14.52, the New York-listed shares trade at an eye-popping 95 times the 15 cents a share analysts expect it to earn in 2004 (the consensus calls for a loss this year). That's far above the company's median forward multiple of 29.7 times over the past five years.
Of course, Celestica does have some strengths, most notably a strong balance sheet. It has $1.2 billion, or $5.29 a share, in cash; a debt-to-capital ratio of 17%; and it has been buying back shares. But unless something's done about the market-share slide and the cost picture -- and fast -- Celestica's starry stock could return to earth with a thud. |
