Buy the Pullback: Celestica (CLS) — Engineering as a Durable Differentiator

Hook & thesis

Celestica is no longer just an electronics contract manufacturer. Over 2025 it has shown the kind of engineering-led lift that turns cyclical services into sticky, higher-margin relationships with hyperscalers and capital equipment vendors. Sequential results through 09/30/2025 show accelerating revenue and expanding gross and operating margins while the company quietly returns capital to shareholders. That mix - product differentiation + improving unit economics + buybacks - is tradeable into the market's next inflection point: Q4 results (scheduled 01/29/2026).

My thesis: buy a measured pullback in CLS (ticker CLS) for a swing/position trade. The entry is a pullback or base-confirming move near 300-320, stop below 275, with staged upside targets at 375 and 450. The trade rests on continuing margin recovery, AI/data-center platform wins, and share re-purchase supports. Risks include valuation, inventory build, and customer concentration - discussed below.

Business primer - what Celestica does and why it matters

Celestica provides end-to-end supply chain and engineering solutions across two segments: Advanced Technology Solutions (ATS) and Connectivity & Cloud Solutions (CCS). The company generates a majority of its revenue from CCS (communications and cloud) while ATS covers aerospace & defense, industrial, health tech and capital equipment (including semiconductor and robotics equipment). The market cares because the CCS segment ties directly to data-center, networking and hyperscaler capex cycles. When hyperscalers need higher-density storage or specialized AI platforms, engineering-led manufacturers with validated platforms win larger, stickier programs and better margins.

Why that is important now: public disclosures and press commentary flag the SD6300 platform and other storage-density work targeted at AI applications. If Celestica can convert product development wins into scalable supply agreements, that elevates revenue quality from transactional build-to-order to programmatic, architecture-level partnerships.

What the numbers say (Q1-Q3 FY2025 run):

• Revenue momentum: Q1 (03/31/2025) revenue was $2,648.6M, Q2 (06/30/2025) was $2,893.4M, and Q3 (09/30/2025) was $3,194.0M. Sequential growth across the year demonstrates rising demand and improving mix.
• Margin expansion: gross profit rose from $273.9M in Q1 to $371.0M in Q2 and $416.1M in Q3. Gross margin improved roughly from ~10.3% (Q1) to ~13.0% (Q3). Operating income followed: Q1 operating income $128.8M -> Q2 $272.5M -> Q3 $325.0M, implying operating margin now north of 10% in the most recent quarter.
• Net income & EPS: net income progressed from $86.2M (Q1) to $211.0M (Q2) to $267.8M (Q3). Diluted EPS in Q3 was $2.31.
• Cash flow & balance sheet: operating cash flow is positive across the year (Q1 $130.3M, Q2 $152.4M, Q3 $126.2M). Current assets rose to $5,142.8M in Q3 while current liabilities are $3,502.3M, giving a working capital cushion (~$1.64B). Inventory has increased to $2,046.7M (Q3) which is a dual-edged signal (build for demand vs. potential stocking risk).
• Capital allocation: financing cash flows were negative across quarters (e.g., Q3 financing outflow $96.8M), and the company announced a Normal Course Issuer Bid referenced in its 01/07/2026 filing, which supports per-share metrics.

Valuation framing - explicit math and caveats

Market price (latest snapshot) closed at $318.97. The most recently reported diluted average shares is 115.9M (Q3), so a simple market-cap estimate is:

Estimated market cap = $318.97 * 115.9M ≈ $36.97B

Using the sum of reported revenue for Q1-Q3 FY2025 (through 09/30/2025) — which is the best completed-period number in filings — trailing revenue across those three reported quarters is $8,736M. That yields:

Market cap / (Q1+Q2+Q3 revenue) ≈ $36.97B / $8.736B ≈ 4.2x

Note the important caveat: Q4 FY2025 is not in the dataset. If Q4 contributes materially, the effective P/S and P/E would compress. Using net income summed for Q1-Q3 ($565M), market-cap / net income is ~65x; on an annualized EPS basis (Q3 diluted EPS 2.31 x4 = ~9.24), the simple price/EPS yields ~35x. The wide range shows valuation sensitivity to a single missing quarter: the company’s multiple looks rich on a nine-month basis but more palatable if Q4 is strong or if revenue growth accelerates into FY2026.

Catalysts (what to watch)

• 01/29/2026 - Celestica Q4 FY2025 results and conference call. This is the primary near-term catalyst and the logical event to re-assess the thesis.
• Hyperscaler wins and product ramp - public commentary around the SD6300 platform and any announced supply agreements or ramp schedules.
• Share buyback cadence - execution and magnitude of the Normal Course Issuer Bid; steady buybacks support EPS and signal management confidence.
• Gross/operating margin sustainability - continued sequential improvement beyond Q3 would validate claims of engineering-driven mix improvement.

Trade plan (actionable)

• Trade direction: Long.
• Time horizon: Swing / position (3-9 months) into post-Q4 results and program ramps.
• Entry: 300-320. If price is above entry, wait for a shallow pullback or consolidation within that range. Consider scaling in (25% at 320, 50% at 310, 25% at 300).
• Initial stop: 275 (risk ~9-13% from entry zone). Tighten stop to breakeven after first target is hit.
• Targets:
  • Target 1: 375 (short-term target; reflects multiple re-rating to ~4.5-5x revenue on execution).
  • Target 2: 450 (if Q4 beats and management prints stronger visibility into 2026 program ramps).
• Position sizing & risk: Keep position size consistent with a medium-risk idea; this is not a capital-preservation trade. Use the stop consistently; 275 invalidates the core thesis because it implies program disappointments or material margin compression.

Risks and counterarguments

• Valuation is elevated: Using reported Q1-Q3 net income, the implicit multiple is high (~65x). The company needs either a strong Q4 or visible 2026 growth to justify the current market valuation. Counterargument: revenue and margin acceleration driven by AI/data-center ramps can materially expand the numerator in valuation math, compressing multiples.
• Inventory buildup: Inventory rose from ~$1.79B (Q1) to ~$2.05B (Q3). That can be healthy pre-ramp, but if end-customer orders slow the company could be stuck holding slow-moving stock which would pressure margins and free cash flow.
• Customer concentration and program risk: Large customers (hyperscalers, OEMs) can negotiate hard. A single program deferral or design change could meaningfully change quarter-to-quarter results.
• Supply-chain & execution risk: As Celestica shifts to higher-density platforms, manufacturing complexity and material sourcing can elevate risk. Execution errors (quality, yield) would quickly barge through to margins.
• Macroeconomic / capex cycles: End markets like communications and capital equipment are cyclical. If hyperscaler capex cools, demand for specialized platforms could be deferred.

Counterargument I respect: the stock is expensive until we see a full year of improved margins and explicit program ramps. Waiting for the 01/29/2026 results to confirm Q4 and FY2026 guidance is a conservative alternative to jumping in now.

What would change my mind?

I would reduce the bullish stance or flip neutral/negative if any of the following show up in Q4/early 2026 disclosures:

• Clear evidence of demand softening (sequential revenue decline vs Q3) or guidance that materially reduces FY2026 expectations.
• Inventory that does not convert to sales within the next two quarters, or material write-downs.
• Gross- and operating-margin reversal (i.e., margins fall meaningfully back toward single digits) absent a one-time item.
• Management confirms limited visibility on program ramps or cancels the Normal Course Issuer Bid.

Conclusion & bottom line

Celestica is trading as a growth-optionality story priced for continued execution. The company has delivered sequential revenue and margin improvement through 09/30/2025, with evidence that engineering-led platform work (storage density, SD6300 mentions) is moving from R&D to revenue. That combination plus buybacks makes a disciplined long entry attractive between 300-320 with a stop at 275 and staged upside targets of 375 and 450.

My posture is moderately bullish: this is a buy-on-strength or buy-the-pullback setup, not a speculative gamble. The trade is contingent on Q4 results (01/29/2026) confirming ramp visibility; absent that confirmation, risk management (tight stops, smaller position) is advisable.

Disclosure: This is a trade idea for informational purposes and not personalized investment advice. Do your own research and size positions consistent with your risk tolerance.