Doing business with Research in Motion Ltd. (RIMM) and Microsoft Corp. (MSFT) over the past few quarters has paid off for Celestica Inc. (CLS). So much so, the electronics manufacturer now has its sights set on Apple Inc. (AAPL), says Gus Papageorgiou, Scotia Capital analyst.
"RIM has been a 10% customer for Celestica in the last two quarters and we believe sales related to Microsoft's Xbox 360 have been strong as well," Mr. Papageorgiou said in a note to clients this week.
Celestica has not traditionally played in the consumer space; however, we believe its track record with these customers could lead to additional consumer wins and significant incremental sales.
To that end, the analyst believes Celestica has been aggressively pursuing Apple as a new customer by developing or buying expertise in areas such as materials management – for instance aluminum enclosures.
The analyst wrote:
We see Apple as an ideal customer for Celestica in the consumer space. Assuming Celestica could win a program representing 5% of Apple's COGS, which we believe is reasonable, we estimate a win with Apple could contribute $1-billion in annual revenue to CLS.
Mr. Papageorgiou calculated that every $250-million in additional revenue would deliver an extra $.08 of EPS if Celestica can maintain its gross margins between 7% and 7.5%. In other words, a deal with Apple could bring additional earnings of $.32, an increase of 40% to estimated 2010 profits of $.80 per share.
In the interim, he said Celestica will continue to generate positive cash flow from "industry-leading" operating performance, and offers good value for investors. His "sector perform" rating and 1-year price target on Celestica stock at C$9.40 remains unchanged.