Jim and Abigail Zimmerman of Lowell Capital Management presented their thesis on Celestica (Canada/US: CLS) at Wide-Moat Investing Summit 2022.

Thesis summary:

Celestica is a Canadian multinational electronics manufacturing services (EMS) company that operates in two segments: Advanced Technology Solutions (ATS) and Connectivity & Cloud Solutions (CCS). The company offers product manufacturing and related supply chain services, serving the aerospace and defense, industrial, energy, health tech, and capital equipment industries.

Celestica has a resilient business model with deep customer relationships. It is highly cash-generative, with low capital expenditure needs. It also has a “Ft. Knox” balance sheet, with net debt to adjusted EBITDA of less than 1x. The business generated almost $500 million of FCF over the past five years, or close to one-third the recent market cap. Capex requirements average 1-2% of revenue annually. More recently, management has been requiring large cash deposits by customers to offset higher inventory levels, deal with supply chain issues, and maintain high ROIC.

The company focuses on higher value-added services, with longer-term and stickier customer relationships. It also focuses on industries that are sustainably growing over the long term, which has resulted in a record of strong sales growth, both organic and inorganic.

Management has prioritized accretive acquisitions and return of capital in a disciplined way. Celestica has funded successful strategic acquisitions with its strong FCF, most recently PCI in late 2021. Acquisitions have strengthened the business model and resiliency. The company has repurchased a substantial number of shares over time, amounting to 14+% of shares outstanding in the last five years and 32+% of shares over the past decade.

The valuation is attractive, with enterprise value to adjusted EBITDA of ~4x. Estimated adjusted EPS in 2022E and targeted adjusted EPS by 2025E are $1.70 and $2.00, respectively, as compared to a recent market quotation of $10 per share. Celestica’s earnings multiple could expand as the resiliency of the business model and growth become more apparent to the market.

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About the instructor:

Jim Zimmerman is founder and portfolio manager of Lowell Capital Value Partners, LP, successor fund to Lowell Capital Fund, L.P. Jim managed Lowell Capital Fund L.P. from 2003 to 2015 employing a proprietary strategy laser-focused on smaller and/or misunderstood companies with large, sustainable free cash flow yields and “Ft. Knox” balance sheets. He generated a compound annual return significantly exceeding the HFRI Equity Hedge Index and the S&P 500 Total Return Index over this period, despite holding a significant net cash position (~30%) for most of this period. Jim has over 25 years of investment banking and investment management experience in a variety of industries and has been involved with several billion dollars of investments. Jim graduated with a BA with high honors in economics from Princeton University in 1980 and an MBA from Stanford Business School in 1984. He worked at Drexel Burnham Lambert, Inc., 1984 to 1990, serving in the Corporate Finance Department and multiple other investment banks from 1990 to 2003.

Abigail Zimmerman works alongside her father at Lowell Capital. Abigail earned her B.A. in Business Administration at Loyola Marymount University in Los Angeles and has worked with Jim for the last several years. She assists in the generation of new ideas, administrative duties, research of small and medium cap companies, and detailed due diligence on potential investments.

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