One of the cheapest stocks in our All Investable Stock Screener is Celestica Inc (NYSE:CLS).
Celestica Inc (Celestica) is a US-based EMS company. It delivers supply chain solutions to customers in the communications, industrial, aerospace and defense, healthcare, solar, semiconductor equipment and other sectors.
A quick look at Celestica’s share price history over the past twelve months shows that the price is down 5%, but here’s why the company is undervalued.
(Source: Google Finance)
The following data is from the company’s latest financial statements, dated June 2017.
The company’s latest balance sheet shows that Celestica has $583 Million in total cash and cash equivalents. Further down the balance sheet we can see that the company has $40 Million in short-term debt and $180 Million in long-term debt. Therefore, Celestica has a net cash position of $363 Million (cash minus debt).
If we consider that Celestica currently has a market cap of $1.631 Billion, when we subtract the net cash totaling $363 Million that equates to an Enterprise Value of $1.268 Billion.
If we move over to the company’s latest income statements we can see that Celestica has $192 Million* in trailing twelve month operating earnings which means that the company is currently trading on an Acquirer’s Multiple of 6.61, or 6.61 times operating earnings. That places Celestica squarely in undervalued territory.
The Acquirer’s Multiple is defined as:
Enterprise Value/Operating Earnings*
*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.
It’s also important to note that if we take a look at the company’s latest cash flow statements we can see that Celestica generated trailing twelve month operating cash flow of $286 Million and had $79 Million in Capex. That equates to $208 Million in trailing twelve month free cash flow, or a FCF/EV Yield of 16%.
In terms of the company’s ROE. A quick calculation shows that the company had $1.274 Billion in equity for the quarter ending March 2017 and $1.322 Billion for the quarter ending June 2017. If we divide that number by two we get $1.298 Billion. If we consider that the company has $132 Million (ttm) in net income, that equates to an annualized Return on Equity (ROE) for the quarter ending June 2017 of 10%.
Lastly, Celestica’s current revenues of $6.206 Billion (ttm) are the highest in the past five years with the exception of one year 2012 when revenues were $6.507 Billion however, its important to remember that in 2012 the company’s free cash flow was the same it is today, $208 Million (ttm). The difference is a significant reduction in capex from $106 Million in 2012 to the $79 Million (ttm) that we see today. Also noteworthy are the company’s current EPS of $0.92 (ttm) compared with $0.56 in 2012 and BVPS which is currently $9.20 (ttm) compared with $7.20 in 2012, an increase of 28%.
In terms of Celestica’s current valuation, the company is trading on a P/E of 12.3 compared to its 5Y average of 18**, a P/B of 1.2 compared to its 5Y average of 1.3**, and a P/S of 5.7 compared to its 5Y average of 11.3**. The company has a FCF/EV Yield of 16% (ttm) and an Acquirer’s Multiple of 6.61, or 6.61 times operating earnings. Celestica has an annualized Return on Equity (ROE) for the quarter ending June 2017 of 10% (ttm). All of which indicates that the company is undervalued.
** Morningstar
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