Is Celestica Worth Buying After 53% Revenue Growth?

Anand Chokkavelu: Welcome, latest Motley Fool Scoreboard. I'm Anand Chokkavelu and we've got longtime Fools, Matt Frankel and Jon Quast giving a 1-10 rating to a top 100 stock in the primary hint GEMs database. It's Celestica, ticker symbol CLS. Not my favorite band from the '90's. We'll first rate the strength of Celestica's business, including factors like industry and competition. A ten is invincible, a one is hopeless. Matt's at a seven. Jon, you're at a six. Jon Quast: I'm at a six. I feel like I'm being Johnny McCcritical pants, but here's the thing. The AI infrastructure buildout is absolutely booming. It has impressive market share Celestica, some estimates 40% market share for the Ethernet switches, and that's really big in these data centers. What I don't like about the business is that it's low margin. I don't think that investors should expect better times than right now, and even still the gross margin is only 11%. That is not great. When you think about the fact that it's having to invest now in some capital expenditures for increased manufacturing, I don't like that necessarily. There's questions about the longevities of the trends. Is it going to over invest and then be stuck with a very low margin software business? That concerns me. But I will give it credit because it does not only make generic solutions, but it works with its customers to design hardware for their needs. I think that may make it a little bit stickier of a business, so I want to give it some credit there, but overall, I'm at a six. Matt Frankel: The strength of this business is its manufacturing expertise, the deep relationships it has, especially with the hyperscalers. Data Center Infrastructure, it's a clear tailwind, 53% revenue growth in the first quarter. To Jon's point, contract manufacturing is a relatively low margin business by nature. But in my mind, the rapid growth helps to offset that a little more than I think Jon was saying, so that's why mine's probably a point higher. Anand Chokkavelu: For management, a 10 is Warren Buffett. A one is Homer Simpson. Once again, Matt's at a seven, Jon, you're at a six. Jon Quast: I really wasn't sure what to say here because the industry tailwinds are so strong. Do I give the credit to management or is it just in the right place at the right time? I'm a little bit of the opinion it's in the right place at the right time. You look at its revenue over the last five years. It's basically doubled, but it was essentially flat in the five years preceding that. CEO Rob Mionis has been there the entire time of the time that I'm referencing here. I'll give him a lot of credit in the sense that, the stock based-compensation is low, but buybacks are also non-existent. I'll give him credit that he is spending on research, but then again, it's only 1% of revenue there. I'm not really sure what the company's capital priorities are. I'm not really sure what I can credit management for. I think that the tailwinds are just in the right direction, and that is to the benefit of the business. Matt Frankel: I feel like Jon and I are very aligned with most of these. If Jon were a teacher, he'd just be a harsher grader than I was. I'm at a seven here. Mionis he led the pivot away from being a legacy electronics manufacturing business to really that focus on AI infrastructure. As Jon said, most of the revenue growth in the past two years, but they were on the forefront of that and really were a beneficiary. Can't say that for every company that could have pivoted to AI, so he got the company ahead of the curve nicely. Nothing else too exceptional, as Jon pointed out. But I don't see any big red flags either, so I'm at a seven. Anand Chokkavelu: For financials, a 10 is a fortress, a one is yikes. This time, Jon drags Matt down into the six range. Jon Quast: Yeah, a critical spirit is very contagious. Look, I feel like a broken record here. There's nothing like Matt said, a red flag here with the financials, but nothing really that is wow, other than the growth, the recent growth in recent years has been impressive, but you look at the gross margin, nothing to write home about. The operating margin is okay at 8% and that has roughly doubled in recent years, that is good. I don't like that it has net debt. The cash position is really low at about 1% of its market cap right now, so the financials didn't wow me. Matt Frankel: Neither of us are giving out a lot of A's on this episode. We're at a six right here. I'm at a six as well. Revenue growth is excellent. Margins are low but improving. Adjusted EPS was up 80% in the first quarter, so it's becoming more profitable. A strong track record of underpromising and over delivering. They beat their own guidance, most of the past two years. A manageable debt load, but nothing stellar here that jumps out, so six. Anand Chokkavelu: Matt, let's talk valuation. How well will Celestica stock do over the next five years and how safe is it? Ten's a short thing? One's a lottery ticket. Matt Frankel: I actually gave this a pretty high safety score of seven. They trade for a reasonable valuation considering its growth and what some other companies in this space trade for. It's more than I can say for most other AI infrastructure beneficiaries right now. A strong and diverse customer base, it shouldn't help investors sleep well at night. Any customer of the hyperscalars right now that's trading reasonably is a fairly safe bet. I see Celesticas roughly matching the market's performance over the next few years, so I said 5-10%, probably toward the higher end of that range. Jon Quast: I'm a little bit lower on safety just because I don't like the fact that it's having to spend money to increase its output when it is a low margin business with some potential cyclicality there. I think that makes it a little bit riskier, but listen, investors could do a lot worse than Celestica. It's in the right place at the right time. It is growing well. I would worry about it trading at 35 times earnings. That's cheaper than many players out there, but at the same time, I think the most likely scenario here is Celestica keeps growing like crazy. That enthusiasm wanes a little bit and that valuation comes down and the net result is going to be modest returns, maybe 0% or 5% for shareholders who buy today. Anand Chokkavelu: Thank you to Jon and to Matt. They've given Celestica a low overall score of 5.9 out of ten. Jon prefers Jabil as a top it. Look out for a new scoreboard every market day at 7:00 p.m. Eastern. Next up is something good. I promise, till then Fool on.