Celestica's a Rising Star

Head to Head

Partly as a result of the divergent exposure, fundamentals for the two companies are moving in opposite directions. Jabil has seen its per-share earnings estimates for the fiscal year ending in August plunge from $1.32 three months ago to just $1.06 today. Next year's forecasts have also been slashed from $1.74 a share to $1.34. Meanwhile, the 2008 per-share estimate for Celestica has skyrocketed from 53 cents to 72 cents since the company's strong earnings report in late April.

What's more, the earnings at Celestica appear to be of higher quality than those of Jabil. Based on the accrual ratio, there is a 33% difference between Jabil's accounting earnings and its cash earnings. The lower the ratio, the more similar the cash and accounting earnings, which reduces the likelihood that discretionary items are fueling the earnings report. Celestica's accruals are half the level of Jabil's.

Both companies have generated strong free cash flow over the last 12 months. Celestica generated $500 million in cash from operating activities and used just $66.3 million for capital expenditures. The resulting $434 million in free cash flow amounts to nearly a 20% free cash flow yield. Jabil, meanwhile, generated $383 million in free cash flow over the last 12 months, resulting in a 16.6% yield.

In both cases, the free cash flow is overstated somewhat due to declines in working capital investments. Since both companies were affected, though, the relative advantage for Celestica still seems meaningful. Furthermore, its cash flow from operations has been generally improving over the last five years. Though Jabil's also improved following the tech/telecom bust, it has been heading the wrong way for the last couple of years. Celestica's turnaround just seems more reliable to me.

From a valuation perspective, both companies are trading below book value, and the growth rates expected for each look to me to be within the margin of error. So the choice seems easy to me. I'd go with the one whose estimates and cash flow are moving in the right direction.

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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.