Celestica's a Rising Star

The electronic manufacturing services industry is notorious for having fairly high financial and operating leverage. This leverage, in turn, tends to exaggerate the industry's response to the business cycle. When profits start to turn up, the leverage can send the stocks soaring.

The problem is often in timing. When will the market bottom, allowing investors to capture the maximum portion of the potential gains? Given the high exposure these companies can have to single customers or industries, it can often be determined in part by the health of their customers.

If I had to make a call today in this space, I think I'd go with Celestica (CLS - commentary - Cramer's Take) and avoid or short Jabil (JBL - commentary - Cramer's Take).

Indecent Exposure

In 2007, Cisco (CSCO - commentary - Cramer's Take) accounted for 15% of Jabil's total revenue, and Nokia (NOK - commentary - Cramer's Take) made up 13%. In the latest quarter, Hewlett Packard (HPQ - commentary - Cramer's Take) was a 10% customer, but Nokia was not. 29% of total sales were into consumer markets, which is not the place to be.

Although Cisco's earnings exceeded estimates Tuesday night, it is only because those estimates had fallen steadily over the last 90 days. The cautious guidance suggests that the company either won't need as many boards or it'll negotiate even more ferociously for price. Either way, its suppliers could face a tough period.

Tero Kuittinen has been reticent about Nokia's outlook, saying that softening demand for expensive handsets at the same time that large touchscreens are capturing the imagination of consumers could mean a nasty double whammy.

Cisco is also Celestica's largest customer. Cisco and IBM (IBM - commentary - Cramer's Take) each account for about 10% of Celestica's revenue. However, the company's end-market exposure is much more favorable: 28% enterprise and just 11% consumer. And at least IBM has been boosting its guidance and its dividend.

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At the time of publication, Trent had no positions in the stocks mentioned, although positions may change at any time.

William A. Trent, CFA, is a freelance equity analyst based in the New York metro area. He has been an equity analyst since 1996 and is co-author of Understanding and Evaluating Prospectuses, Offering Documents, and Proxy Statements. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Trent appreciates your feedback; click here to send him an email.