UBS sees balanced outlook for Celestica stock amid AI growth and valuation concerns

Friday, UBS initiated coverage on Celestica (NYSE:TSX:CLS) stock with a Neutral rating and set a price target of $95.00. The coverage begins amidst expectations of strong investments in AI by several of Celestica's key hyperscaler customers.

Additionally, a rebound is anticipated in Advanced Technology Solutions (ATS) following a 5% decline in the calendar year 2024 to a low-single digit growth in the calendar year 2025. This growth is expected to be driven by a recovery in the Industrial sector and solid growth in HealthTech.

Despite the optimistic outlook for Celestica's near-term fundamentals, the current share price reflects some caution. With shares trading at approximately 21 times the next twelve months (NTM) consensus earnings per share (EPS), compared to the trailing 1-, 3-, and 5-year averages of 14 times, 9 times, and 9 times respectively, there is an indication that the shares may already account for significant growth expectations.

The analysis by UBS suggests that Celestica's shares are pricing in at least a 10% growth over the next ten years. This is in contrast to the calendar year 2025 revenue growth guide of approximately 8.3% and an EPS guide of $4.42. UBS estimates a slightly higher revenue growth at 10.1% and EPS at $4.50 for the same period.

With the stock trading around $92, UBS advises caution, suggesting that the risk/reward profile is balanced at this point. The recommendation from UBS is to look for a more attractive entry point before investing in Celestica's shares. The firm's stance is based on the current valuation and the long-term growth already factored into the stock price.

In other recent news, Celestica Inc (NYSE:CLS). reported strong third-quarter performance for 2024, leading BMO Capital Markets and RBC Capital to raise their stock price targets to $72 and $75, respectively.

Both firms maintained an Outperform rating, with the company's Communications and Enterprise segment, particularly the switching business, driving these positive results. Additionally, Celestica launched its new DS4100 data center switch, addressing the growing demands of AI/ML data center networking.

Stifel upgraded Celestica's stock from Hold to Buy, maintaining a price target of $58.00. However, a CIBC (TSX:CM) analyst downgraded Celestica to Neutral, despite raising the stock price target, due to potential slower growth in the Enterprise segment. In another move to support growth initiatives, Celestica expanded its senior secured credit agreement to $1.5 billion.

These recent developments provide investors with insights into Celestica's financial performance and analyst perspectives. It's important to note that this information is based on the facts presented in past articles and does not include any speculative content.

InvestingPro Insights

Recent data from InvestingPro adds depth to UBS's analysis of Celestica (NYSE:CLS). The company's market capitalization stands at $10.65 billion, with a P/E ratio of 29.21, aligning with UBS's observation of the stock trading at elevated multiples compared to historical averages.

Celestica's revenue growth remains robust, with a 17.52% increase over the last twelve months and a notable 22.33% quarterly growth in Q3 2024. This supports UBS's projection of continued growth, albeit with some caution regarding current valuations.

InvestingPro Tips highlight that Celestica is trading at a low P/E ratio relative to near-term earnings growth, with a PEG ratio of 0.3. This suggests that despite the recent price surge, there might still be value relative to the company's growth prospects. Additionally, the stock has shown significant momentum, with a 63.29% return over the past month and a 243.63% return over the last year, trading near its 52-week high.

It's worth noting that while UBS recommends caution, InvestingPro data indicates that 8 analysts have revised their earnings upwards for the upcoming period, potentially signaling continued optimism about Celestica's performance.

For investors seeking a more comprehensive analysis, InvestingPro offers 17 additional tips for Celestica, providing a broader perspective on the company's financial health and market position.

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