No preamble kids, let’s get right to the latest stock I’m looking at — Celestica (TSX:CLS).
It’s a tech company, but it’s mostly in the manufacturing space. Companies approach it to make the newest gadget, or piece of medical equipment, or whatever. Celestica does everything from helping to design it to making sure it gets shipped to the retailer. BlackBerry was the company’s biggest customer, until it dumped it for Foxconn and its ability to produce more on demand.
Let’s look at the balance sheet first, because it’s succulent. The stock trades at $11.40 as I type this. Cash on hand is about $2.90 per share (or $520 million). There’s no debt, and it has a little less than $100 million worth of intangible assets. It currently trades for about 1.4 times book.
Revenue took a beating when BlackBerry hit the road. It went from $6.5 billion in 2012 to $5.8 billion in 2013. But profit actually went up, rising from $117.7 million to $118 million. Hey, baby steps. That translates from $0.56 to $0.64 per share.
Wait a second. How does profit jump that much per share even though it was basically flat?
Because of all the share buybacks.
Shares outstanding dropped from 230 million at the end of 2010 to 185 million at the end of 2013. As of June 30th, there’s 182 million shares outstanding. The company just filed with the TSX for permission to buy back another 6.5% of the float from now until September, 2015. That’s a little more than 10 million shares.
Earnings over the last 12 months have been $0.85 per share. That puts it at a pretty decent 13 times earnings (for some reason both the Globe and Mail and Google Finance list earnings higher. I’m being conservative.). But once you strip out the massive cash pile, you get a P/E ratio of just 10x. That ain’t bad.
Of course, there’s a few reasons for it being so cheap.
It doesn’t have huge margins. Operating margins are a little more than 3%, and that’s after a real effort to replace the BlackBerry revenue with stuff that is more profitable. It’s been working, but those aren’t very high margins. There’s not a lot separating the company from losing money. Even its return on equity isn’t great, coming in at around 8% over the last couple years.
It’s pretty boring old school tech, but it’s still tech. Meaning, technology could change and render the company pretty much useless. Management is mitigating this by getting more into the engineering side of the business and less into gadgets (thanks again, BlackBerry), but there’s still that risk.
Like a lot of other value stocks, it needs a catalyst. I think the company should immediately institute a dividend of about 40 cents per share. That would make it attractive to the world of dividend investors, and we all know how excited they get about gettin’ paid, yo. There would easily be enough cash flow to cover it, and the massive stockpile of cash could continue being allocated towards buying back stock.
Or it could make an acquisition. That could be helpful, but I dunno. Those are always a crapshoot. Management has a way of overpaying for these things. Celestica has made a few small acquisitions over the years, but nothing major. Management seems pretty prudent, especially considering the share buyback, but it’s not something I’d really want them to do.
Considering all the negatives, I’m not comfortable buying at these levels. It’s not that it’s a bad value, it’s just not great value, especially considering the quality of the earnings, which are just okay, considering the poor margins. It’s a stock you might look at picking up 10 or 15% lower.
In 2012 it reached a high of close to $10 per share, and dipped under $7 at one point. It had the same amount of cash on the balance sheet, and made $0.56 per share. Once you strip out the $2.90/share in cash, the company traded as low as 7.4 times earnings. I’d like to pick it up closer to that value, rather than the 10x ex-cash P/E it trades at today.
I’m putting Celestica on my watch list, and will look at it very closely if it falls another 10%. You should too.