Hook / Thesis
Celestica (CLS) went from being perceived as a low-margin contract manufacturer to a higher-margin systems supplier in under a year. Sequential revenue acceleration and improving profitability in FY2025 have pushed margins meaningfully higher: Q3 revenue of $3.194B produced gross profit of $416.1M (about 13.0% gross margin) and operating income of $325M (roughly 10.2% operating margin). Management is pairing that operating leverage with shareholder-friendly capital allocation: recent quarters show consistent buybacks and a Normal Course Issuer Bid on the news calendar.
That combination - durable revenue from connectivity & cloud end markets, meaningful margin expansion, and buybacks - is why I want exposure to CLS here. I prefer buying on modest weakness or a disciplined entry band rather than chasing an intraday spike. Below I lay out the trade (entry/stop/targets), the fundamental argument supported by the numbers, catalysts to watch, and a balanced set of risks and counterarguments.
What the business is and why the market should care
Celestica provides supply-chain and electronics manufacturing solutions across two reportable segments: Advanced Technology Solutions (ATS) and Connectivity & Cloud Solutions (CCS). CCS - servers, storage and communications - is the larger revenue driver. The market cares because CCS ties Celestica to hyperscalers and the AI/data-center upgrade cycle, where customers are spending on higher-density storage and specialized platforms (the company's SD6300 platform was called out in recent press).
Why this matters: moving up the value chain from assembly to platform and systems work lets Celestica capture better margins and recurring services revenue. That shows up in the numbers: the company turned Q1-Q3 FY2025 into a clear trend of sequential improvement in revenue, gross profit and operating income.
Key financial evidence (from recent quarters)
- Top-line acceleration: Revenues rose from $2.6486B in Q1 (01/01/2025-03/31/2025) to $2.8934B in Q2, then to $3.1940B in Q3 (07/01/2025-09/30/2025). Q2->Q3 sequential growth was ~10.4%.
- Margin expansion: Gross profit increased from $273.9M (Q1) to $371.0M (Q2) to $416.1M (Q3). That implies gross margins moved toward ~13% in Q3, up from ~10.3% in Q1.
- Operating leverage: Operating income rose from $128.8M in Q1 to $272.5M in Q2 and $325.0M in Q3.
- Profitability and EPS: Diluted EPS progressed from $0.74 in Q1 to $1.82 in Q2 and $2.31 in Q3, showing rapid earnings ramp. Annualizing Q1-Q3 results gives an estimated EPS run-rate of ~6.49 (see valuation framing below).
- Cash flow & buybacks: Operating cash flow has been solid: $130.3M (Q1), $152.4M (Q2), $126.2M (Q3). Financing flows were negative in each quarter (Q1 -$213.9M, Q2 -$106.6M, Q3 -$96.8M), consistent with share repurchases and other returns of capital. Recent press also lists a Normal Course Issuer Bid on 01/07/2026, which confirms buyback activity.
- Balance sheet: Current assets $5.1428B vs current liabilities $3.5023B (Q3), giving positive working capital (~$1.64B). Inventory sits at $2.0467B (Q3); liabilities total $4.5781B and equity attributable to parent $2.0286B.
Valuation framing - pragmatic and explicit
Market snapshot (latest trade on 01/14/2026): price ~ $310.04. The company reported diluted average shares ~115.9M in Q3 filings. Using those two inputs produces an approximate market capitalization of roughly $36B (115.9M shares x $310.04). Note: the market cap here is a dataset-derived approximation for framing the trade.
To estimate a revenue run-rate, I annualized the average quarterly revenue across Q1-Q3 of FY2025. Q1-Q3 sum to ~$8.736B; the average quarter ~ $2.912B implies a $11.65B annualized revenue run-rate. That implies a current P/S near ~3.1x (36B / 11.65B).
On an earnings basis: summing diluted EPS across Q1-Q3 gives 0.74 + 1.82 + 2.31 = 4.87; annualizing that (4.87 *4/3) yields an estimated EPS run-rate near $6.49. At $310 that produces an estimated forward P/E of roughly 48x. That P/E is high versus legacy contract-manufacturing multiples, but the market appears to be paying up for accelerating earnings, margin expansion and AI-era product content. The implied operating-income run-rate (Q1-Q3 op income sum 128.8 + 272.5 + 325 = $726.3M; annualized ~ $968M) implies operating margin around 8-9% on the $11.6B run-rate.
How to read that: valuation is not cheap in absolute terms, but it can be rational if Celestica sustains revenue growth, preserves incremental margins, and converts operating income to free cash flow while continuing buybacks. This trade idea therefore assumes continued margin durability and execution against higher-value CCS platforms.
Actionable Trade (my preferred setup)
Trade direction: Long
Time horizon: Swing / Position (3-9 months)
Risk level: Medium
Entry band (primary): $295 - $320. If you own none, look to initiate into weakness inside this band or on a 5-10% pullback from $310. Chasing above $330 is not recommended unless you cut size.
Initial stop-loss: $270 (about 12-13% below the mid-entry price). Put another way, if the stock breaks and closes below $270 on heavy volume, that would indicate the recent margin story is at risk.
Targets:
- Near-term target (partial sell): $360 - captures a re-rating to modestly higher multiple or post-earnings pop. This is in the range of the recent intraday highs near $350-$360.
- Medium target (add/trim): $420 - assumes continued beat-and-raise cadence for revenue and margins across the next two quarters.
- Stretch target (longer hold): $500 - requires sustained execution, stronger free cash flow conversion and continued buybacks or a higher revenue run-rate from hyperscaler/platform orders.
Position sizing note: given the valuation and earnings sensitivity to cyclical demand, keep any single position to a size consistent with a 10% portfolio allocation at most for retail accounts and smaller for more risk-averse investors.
Catalysts to watch (2-5)
- 01/29/2026 Q4 FY2025 results and conference call - management commentary on order backlog, SD6300 platform traction and margin outlook will be decisive.
- Quarterly buyback cadence and balance-sheet commentary - continued repurchases materially support EPS even if top-line growth moderates.
- Hyperscaler design wins or multi-quarter engagements for server/storage platforms - public announcement or customer-confirmed programs would reduce execution risk.
- Gross margin sustainability in CCS products across at least two quarters - if margins hold, the market can justify a re-rating from ~3x P/S to a higher multiple.
Risks and counterarguments
There are concrete reasons to be cautious. Below I list the primary risks and at least one counterargument to my bullish stance so you can see what would invalidate this trade idea.
- Customer concentration and order volatility. Celestica serves large hyperscalers and communications customers; losing or delaying a major program could quickly pressure revenue and margins.
- Margin sustainability is unproven. Q1-Q3 FY2025 showed nice sequential expansion, but sustaining ~10%+ operating margins (from a legacy low-margin base) requires consistent product mix improvement and tight cost control. A hiccup in mix or higher commodity/labor costs would compress margins quickly.
- Valuation sensitivity. The dataset-derived market cap (~$36B) and our annualized EPS put P/E near ~48x. That multiple assumes growth and margin durability; any sign of demand reversion would invite a fast de-rating and sizable drawdown for holders.
- Supply chain / execution risk. As a contract manufacturer, Celestica is still exposed to supply constraints, logistics disruptions, or input-cost inflation that could hit both revenue and margin in the near term.
- Share-price volatility. The stock has already moved sharply higher over the last 12 months; momentum can reverse quickly. Trading near $310 means timing matters for new entrants.
Counterargument: Much of the good news is already priced in. The market appears to be paying a premium for an AI/data-center narrative and for near-term margin improvement. If Q4 guidance slips or if customer spend moderates, CLS could trade down sharply. That is the bear case and the reason for a tight stop.
What would change my mind
I would downgrade from a tactical long to neutral/short if any of the following occur:
- Q4 results (01/29/2026) show revenue contraction quarter-over-quarter or a sequential drop in gross margin below Q2 levels.
- Management discloses a material delay or cancellation of a large CCS platform order.
- The company materially slows or suspends buybacks while revenue and margins weaken, indicating internally they expect demand weakness.
What would make me add size
- Sustained margin stability or further expansion across two consecutive quarters (Q4 then next quarter), plus confirmation of multi-year customer programs for the SD6300 or similar platforms.
- Continued strong free cash flow with increased buyback authorization that meaningfully accelerates share count reduction.
Final read and stance
Celestica has quietly engineered a margin step-up by shifting mix toward higher-value connectivity and cloud platforms while keeping cash flow and buybacks active. The trade is not bulletproof - it pays to be realistic about the valuation and execution risk. My stance: long within $295-$320 with a $270 stop, partial take-profit at $360, and higher targets of $420 and $500 if execution and customer traction sustain. The upcoming Q4 report on 01/29/2026 and management commentary about platform demand will be the single biggest near-term catalyst and should drive whether this story continues to re-rate or stalls.
Trade with discipline: keep position sizes manageable, honor the stop, and re-assess after the Q4 print. If the company delivers more durable margins and visible multi-quarter customer programs, this position can convert from a tactical swing to a longer-term holding. If management misses expectations or guidance weakens, sell into the noise and move on.
Disclosure: This is not financial advice. The trade idea above is my view based on the company data provided; do your own research and size positions to your risk tolerance.
Conference call reminder: Celestica Q4 2025 results and conference call on 01/29/2026 (press item in the dataset).