Celestica Inc. (CLS) is an unsung hero in the technology sector, quietly providing critical manufacturing and design solutions that power some of the world's most advanced data centers and artificial intelligence (AI) infrastructure. While the company may not grab headlines like some of its flashier tech counterparts, its strategic positioning and impressive financial performance make it a stock worth taking a closer look at.

Company Background and Evolution

Founded in 1996 as a spin-off from IBM, Celestica has evolved from a traditional electronics manufacturing services (EMS) provider to a diversified solutions company, catering to a wide range of industries including aerospace and defense, HealthTech, and the all-important connectivity and cloud solutions (CCS) segment. The latter, which accounted for 67% of the company's total revenue in 2024, has been a particular area of focus and growth, driven by the company's Hardware Platform Solutions (HPS) business.

Celestica's journey began as an IBM manufacturing unit that provided services to IBM for over 75 years. In 1993, the company expanded its services to non-IBM customers, and in October 1996, it was purchased from IBM by an investor group led by Onex Corporation. Celestica completed its initial public offering in 1998, marking a significant milestone in its history.

The company has faced numerous challenges throughout its existence, including the need to adapt to rapid technological changes, evolving industry standards, and fluctuations in customer demand. Global economic and political uncertainties, such as trade disputes and tariffs, have also impacted Celestica's operations and financial performance at various points in time.

Despite these obstacles, Celestica has remained committed to delivering innovative supply chain solutions to its customers. The company has strategically expanded its global network of sites and centers of excellence while investing in enhancing its manufacturing, engineering, and supply chain capabilities. This focus on continuous improvement and adaptation has allowed Celestica to maintain its competitive edge in the ever-changing technology landscape.

Ownership Structure and Strategic Developments

In a significant development for the company's ownership structure, Onex Corporation, which had been Celestica's controlling shareholder, completed underwritten secondary public offerings in June and August 2023. These offerings involved the sale of approximately 18.8 million of Celestica's Subordinate Voting Shares (now designated as Common Shares). As part of this process, Celestica converted all of its outstanding multiple voting shares into Subordinate Voting Shares, and Onex is no longer the controlling shareholder of the company.

Hardware Platform Solutions (HPS) and AI Infrastructure

Celestica's HPS offering encompasses the design, development, and manufacturing of custom infrastructure platforms, hardware, and software solutions tailored to the specific needs of its data center and cloud-based service provider customers. This includes networking switches, servers, storage products, and fully integrated rack-level solutions optimized for the demands of AI and high-performance computing workloads.

The company's strategic investments in research and development (R&D), as well as its acquisitions, have strengthened its HPS capabilities and enabled it to secure high-profile design wins with leading hyperscale and cloud companies. In 2024, the company announced two significant new HPS program awards, including a 1.6Tbps switching program with a large hyperscaler customer and a custom AI-optimized rack solution for a pioneering digital native company.

These wins underscore Celestica's ability to leverage its deep technical expertise and manufacturing prowess to deliver cutting-edge solutions that address the growing demand for data center infrastructure capable of supporting the rapid advancements in AI and cloud computing. As the world becomes increasingly reliant on these technologies, Celestica's role as a trusted partner and solutions provider is only likely to grow in importance.

Financials and Outlook

Celestica's financial performance in recent years has been impressive, with the company consistently delivering top-line growth and margin expansion. In 2024, the company reported revenue of $9.65 billion, a 21% increase compared to the previous year, while adjusted earnings per share (EPS) grew by 58% to $3.88. The annual net income for 2024 was $428.0 million, with an annual operating cash flow of $473.9 million and annual free cash flow of $305.9 million.

This strong financial performance has been driven by the continued growth of the company's CCS segment, particularly its HPS business, which saw revenue increase by 63% in 2024 and now accounts for 29% of Celestica's total revenue. The company's ATS (Advanced Technology Solutions) segment, which includes its aerospace and defense, industrial, HealthTech, and capital equipment businesses, also contributed to the overall growth, though at a more modest pace.

In the most recent quarter (Q4 2024), Celestica reported revenue of $2.55 billion, representing a 19% year-over-year increase, and net income of $151.7 million. The quarterly free cash flow was $95.8 million. The strong growth in Q4 was primarily driven by the CCS segment, particularly the communications end market and the HPS business.

Looking ahead, Celestica has provided an optimistic outlook for 2025, guiding for revenue growth of 11% to $10.7 billion and a 22% increase in adjusted EPS to $4.75. This guidance reflects the company's confidence in its ability to continue capitalizing on the robust demand for data center and AI infrastructure, as well as its diversified business model and operational efficiency.

For Q1 2025, Celestica expects revenue between $2.475 billion and $2.625 billion, representing 15% growth at the midpoint. The company guided for Q1 2025 adjusted EPS between $1.06 and $1.16, an increase of 34% at the midpoint. Assuming the midpoint of Q1 2025 guidance, Celestica expects non-GAAP operating margin to be 6.8%, up 90 basis points year-over-year.

The company also raised its 2025 free cash flow outlook to $350 million, further demonstrating its strong financial position and ability to generate cash.

Liquidity

Celestica maintains a solid liquidity position, which supports its operations and growth initiatives. As of December 31, 2024, the company reported cash and cash equivalents of $423.3 million. Additionally, Celestica had $738.9 million available under its revolving credit facility, providing ample financial flexibility.

The company's debt-to-equity ratio stood at 0.42 as of December 31, 2024, indicating a relatively conservative capital structure. Celestica's current ratio of 1.49 and quick ratio of 0.91 as of the same date suggest that the company has sufficient short-term assets to cover its near-term liabilities.

Segment Performance and Geographic Distribution

Celestica operates through two main segments: Advanced Technology Solutions (ATS) and Connectivity and Cloud Solutions (CCS).

The ATS segment, which includes aerospace and defense, industrial, HealthTech, and capital equipment businesses, generated revenue of $3.16 billion in 2024, representing 33% of Celestica's total revenue. The segment's income and margin were $144.1 million and 4.6%, respectively, for the year. ATS offers a range of specialized manufacturing and engineering services, including high-precision semiconductor and display equipment, industrial automation solutions, and advanced healthcare products.

The CCS segment, comprising the communications and enterprise end markets, produced revenue of $6.49 billion in 2024, accounting for 67% of total revenue. The segment's income and margin were $478.5 million and 7.4%, respectively. CCS focuses on producing enterprise-level data communications and information processing infrastructure, including routers, switches, servers, and storage products. The segment's HPS business has been a key driver of growth, offering higher-margin solutions in firmware/software enablement and IT infrastructure technologies.

Geographically, approximately 70% of Celestica's revenue was produced in Asia and 20% in North America in 2022-2024. Revenue produced in Canada represented around 5% of total revenue in each of those years.

Customer Concentration and Industry Trends

Celestica's top 10 customers represented 73% of total revenue in 2024, up from 64% in 2023 and 66% in 2022. In 2024, two customers in the CCS segment individually represented 10% or more of total revenue (28% and 11%, respectively). This level of customer concentration highlights both the strength of Celestica's relationships with key clients and the potential risk associated with reliance on a small number of large customers.

The EMS industry in which Celestica operates is highly competitive, with multiple global providers vying for customers and programs. Demand can be volatile, and aggressive pricing is a common business dynamic. The industry has seen a shift towards cloud-based and other service providers, which are cyclically different from traditional OEM customers. This shift has created more volatility and unpredictability in revenue patterns, requiring EMS providers like Celestica to be agile and adaptive in their strategies.

Risks and Challenges

While Celestica's prospects appear bright, the company is not without its share of risks and challenges. As an EMS provider, Celestica is subject to the cyclical nature of the technology industry, with customer demand and program ramps-ups and ramp-downs creating volatility in revenue and profitability. The company also faces intense competition from other EMS and original design manufacturer (ODM) providers, as well as the risk of customer concentration, as evidenced by the fact that two customers in its CCS segment accounted for over 10% of total revenue in 2024.

Additionally, Celestica's global operations expose it to various geopolitical and macroeconomic risks, such as trade tensions, currency fluctuations, and supply chain disruptions. The company's ability to navigate these challenges will be crucial in maintaining its competitive edge and delivering consistent financial results.

Conclusion

Celestica Inc. (CLS) may not be a household name, but its critical role in powering the infrastructure behind some of the world's most advanced data centers and AI applications makes it a compelling investment opportunity. With a growing portfolio of high-profile design wins, a diversified business model, and a strong financial profile, Celestica is well-positioned to capitalize on the continued growth of the data center and AI markets.

The company's impressive financial performance, with revenue growth of 21% in 2024 and a positive outlook for 2025, underscores its ability to execute on its strategic initiatives. Celestica's focus on high-growth areas such as its HPS business within the CCS segment, combined with its operational efficiency and strong liquidity position, provide a solid foundation for future growth.

While the company faces its share of risks, including customer concentration and industry volatility, its strategic focus, technical expertise, and operational excellence suggest that Celestica is more than just a "picks and shovels" play on the tech industry. As the world's reliance on data-driven technologies continues to increase, Celestica's importance as a trusted manufacturing and design partner is likely to grow, potentially driving further upside for investors.