Celestia (CLS) Abandons Research in Motion (RIMM)

Shares of Celestica (CLS: Charts, News) plunged at the open yesterday after the Canadian-based contract electronics maker announced that it would stop manufacturing Blackberries for ailing smartphone maker Research in Motion (RIMM: Charts, News). Celestica's stock recovered later during intraday trading, but shares of RIM declined more than 2%.

Research in Motion is Celestica's biggest customer, accounting for 19% of its revenue during the first quarter of 2012. Celestica announced that it would "wind down" its manufacturing relationship with RIM over the next three to six months.

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The problem was already apparent during Celestica's April 24 earnings conference call, when CEO Craig Muhlhauser noted that it was "working with RIM as it assesses its supply chain strategy." Muhlhauser also discussed the possibility of consolidating RIM's business to fewer locations as a viable alternative to completely ending the relationship.

The shift away from manufacturing Blackberries is estimated to cost up to $35 million in restructuring charges, which will dilute Celestica's full year earnings. Muhlhauser stated that the situation would be clearer by the middle of the fiscal year. RIM's ongoing problems, which have led most analysts to predict the company's demise by the end of 2012, have made it impossible for Celestica to provide a full-year outlook. This month, at the WWDC, only 9% of attending developers stated that they were producing software for RIM devices - a steep plunge from 36% last year - leading many to speculate that the company would unlikely survive another year.

Celestica reaffirmed its second quarter guidance for earnings between 20 to 26 cents per share on revenue between $1.65 billion and $1.75 billion. Analysts had been expecting earnings of 25 cents per share on $1.82 billion in revenue. The company is scheduled to report its second quarter earnings on July 27. Despite its strong dependence on RIM, Celestica shares have slid a mere 3% over the past four years. During that same period, RIM crashed 88%.

Celestica is a $1.6 billion company that started as the manufacturing wing of IBM, which operates in 40 locations across 11 countries. The company also manufactures products for IBM Corp. (IBM: Charts, News) and Cisco Systems (CSCO: Charts, News). The company is the largest electronics company in Canada, and trades on both the TSX and NYSE. Although Celestica has never disclosed the exact nature of the products it produces for RIM, industry insiders have reported that the company is responsible for the partial production of the Bold 9900 and the Curve 8520, among others.

Other News About CLS
Toronto's Celestica to stop making products for RIM
Celestica abandons sinking smartphone maker RIM.
Celestica Waving Good-Bye To RIM, No Longer Making Their Handsets
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Published on Jun 19, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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