Who Needs Blackberries? This Stock Could Soar Even Without RIM's Business
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The domino effect of Research In Motion’s (NASDAQ: BBRY) demise continues as it dumps suppliers and these suppliers find the company's once lucrative revenue stream drying up.
Among these suppliers are Celestica (NYSE: CLS), Flextronics International (NASDAQ: FLEX) and Jabil Circuits (NYSE: JBL). I’m highlighting Celestica in this post, and it’s not because it’s the smallest player in the bunch. Celestica is an electronics maker that supplies original equipment manufacturers and service providers in a variety of sectors. Although it won’t be making anymore of RIM’s prized BlackBerry smartphones, I see several positives that may help it increase its stock value.
First, let’s look at Celestica’s relationship with RIM. Based in Canada, like RIM, Celestica had made the BlackBerry Bold and Blackberry Curve. However, in June it announced that its contract would come to an end by the end of this third quarter due to RIM’s efforts to cut its costs. It’s no secret that RIM has been hammered in the smartphone market as consumers have abandoned and ignored BlackBerries and flocked to Apple iPhones and Samsung smartphones powered by Google’s Android operating system. Other smartphone makers that RIM must compete with include HTC and Nokia.
When Celestica announced its second quarter earnings in June, its president and CEO Craig Muhlhauser acknowledged the lackluster demand for RIM’s products.
“Celestica continued to generate cash and achieved solid returns on invested capital in the second quarter, despite the challenging demand environment and the beginning of the wind down of our Research in Motion (RIM) manufacturing business,” he said.
As RIM has lost market share, Celestica’s financials have been pressured significantly. For example, RIM accounted for almost 20% percent of Celestica’s first-quarter revenue this year. That amount was lower than it was for the same period in 2011, and was the direct result of weakening demand for RIM products.
When Celestica announced its earnings for the second quarter, the decline was even more apparent. Revenues clearly showed the impact winding down its RIM operations was having on the electronics manufacturer. They totaled just $1.74 billion compared to $1.83 billion in the second quarter of 2011. Also, Celestica had to absorb a $21.8-million charge related to the wind down of RIM operations.
Now with all that being said, there is hope on the horizon for Celestica. The key to its success lies in it being able to diversify into markets that have higher values and higher margins. Already it is taking those steps. One of its most recent efforts to accelerate its revenue diversification entails acquiring D&H Manufacturing, which is a major supplier in the semiconductor industry. Its products are bought by Applied Materials, Novellus, Lam Research, and KLA Tencor to name a few.
This acquisition supports Celestica's strategy to grow and diversify its revenue base in the industrial, aerospace and defense, semiconductor equipment, green technology and healthcare end markets. This area, referred to as the company’s diversified end market, is already providing a boost to Celestica’s revenues in the wake of profit declines from RIM. For the second quarter of this year, the company reported that revenues from this area represented 19% of its total revenues. This was up from 13% reported for the second quarter of 2011.
The acquisition is expected to close before the year ends. It, as well as Celestica’s other areas of expertise, poise it for substantial growth without RIM’s Blackberry. Also, I hope the company continues to build its products and services in growing areas such as in-flight entertainment and guidance systems and even solar panels.
At the time of writing, Celestica was trading around just under $8, which was within its 52-week range of $6.79 to $10.34. Shares of Celestica, which has a market cap of roughly $1.5 billion, are down 17% this year.
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TwillyD has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services recommend Apple, Google, and Nokia. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
