Someone forgot to tell this company there's a slowdown

Celestica Inc. is enjoying hefty gains by handling manufacturing for scores of well-known high-tech companies.

Somebody tell Celestica Inc. about the high-tech slowdown.

Though technology companies are reporting earnings shortfalls right and left these days, this Toronto-based concern is enjoying hefty gains and remains stubbornly upbeat about its prospects.

That is because Celestica has found a lucrative niche handling manufacturing for scores of well-known high-tech companies. And, while demand for the individual products is famously unpredictable, especially in a slowdown, Celestica appears to have learned how to live with the bumps.

Celestica handles "thousands of new products per month," and can quickly shape its production lines to respond to the ebbs and flows of specific product demand, says Eugene Polistuk, chairman and chief executive officer.

These days, the company does work for a who's who of tech giants including Sun Microsystems (sunw), IBM (ibm), Cisco Systems (csco), Hewlett-Packard (hwp), Dell Computer (dell), Nortel Networks (nt) and JDS Uniphase Corp.

"Only" 27-percent growth this year
World-wide, Celestica makes everything from computer servers and personal computers to data routers and transmission systems used in fiber-optic networks.

Celestica earnings soared last year to US$206.7 million or 99 cents a share, more than triple the 1999 level. Revenue climbed to $9.8 billion, an 84% rise. While revenue growth will slow to 27% or so this year, "adjusted" earnings per share, which exclude the amortization of intangible assets and integration costs related to acquisitions, should jump 42% or more, the company predicts.

These days, of course, many of Celestica's own customers can only dream of Celestica's targets. Just this week, the once-invincible Cisco reported results for its most-recent quarter that fell short of analysts' expectations.

But Celestica says it is still on target to reach annual revenue of some $20 billion in 2003, more than double last year's level.

"I could easily rationalize being more bullish," Polistuk says, adding that the outsourcing of high-tech manufacturing to specialists like Celestica is still in its infancy. "We have, maybe, up to 10 years where outsourcing could be adding growth way beyond the top-line growth" of the technology developers themselves.

It isn't just Celestica. Some of its major rivals in the manufacturing outsourcing business, such as Solectron Corp. of Milpitas, Calif.; SCI Systems Inc. of Huntsville, Ala.; and Flextronics International Ltd. of Singapore also have been growing rapidly. Focusing only on its niche, manufacturing, Celestica says it can offer efficiency and economies of scale that its customers can't achieve. Tech giants busy finding the latest breakthroughs are better off leaving the less glamorous manufacturing to others, Polistuk contends. Doing everything "only works if you've predicted your volumes exactly right, and the reality is there's zero probability of doing that," he says.

Infrastructure and communications
Within its peer group, Celestica particularly benefits from its emphasis on Internet infrastructure and communications products. As a result, it has aligned itself with the handful of big companies that have largely avoided the tech downdraft so far, says Todd Coupland, who follows the electronics manufacturers for CIBC World Markets in Toronto. Celestica makes servers, storage systems, work stations and PCs for Sun and IBM, and those two customers together accounted for between 40% and 50% of Celestica's fourth-quarter revenue of $3.4 billion, he notes.

Purchasing and assembling 15 billion components a year can get tricky, but the company has extensive controls in place to handle the flow, says Marvin MaGee, Celestica's president and chief operating officer, during a tour of the company's highly automated manufacturing facilities in Toronto. Major customers such as Sun, Cisco and EMC Corp. all have specific zones dedicated to their products, but buffer areas handle overflow when certain products are in high demand.

For decades, Celestica was the Canadian manufacturing arm of IBM, and eventually it began making some products for outside companies as well. Toronto buyout firm Onex Corp. acquired Celestica from IBM in 1996 and now holds a majority interest. In just a few years, the company has grown from two plants and a half-dozen customers to 34 facilities around the world serving 60 customers. Employment has risen to 29,000 from 2,500.

But Celestica's success itself creates anxiety. With the company's stock selling at more than 30 times estimated 2001 adjusted earnings per share, some investors worry that the shares are "going to get killed in a [protracted] pullback" in the technology sector, says Mark Lucey, an analyst with TD Securities in Toronto.

So far, the stock has suffered less than other high-tech issues. Trading at $66.75, down $2.50, in 4 p.m. composite trading Wednesday on the New York Stock Exchange, Celestica's shares remain much closer to their all-time high of $87 set last summer than to the 52-week low of $37. Celestica's current financial forecasts are probably "conservative," Lucey says, noting possible further big outsourcing by companies such as Lucent Technologies Inc., scrambling to cut costs.