Sanmina: The Power Of Margin Expansion And Value Unlocked (NASDAQ:SANM)

Sanmina Provides Weak 2024 Outlook and Inventory Crashes

On November 6, 2023, Sanmina Company (NASDAQ:SANM) launched its This fall earnings report. The corporate missed each income and EPS estimates, reporting $2.05B in income, a 7% YoY decline, and $1.42 in EPS, a 5% YoY decline. The corporate additionally gave a weak outlook, anticipating income between $1.85B to $1.95B and EPS between $0.98 to $1.08, each beneath consensus. Sanmina blamed the weak outlook on ongoing changes in buyer inventories, particularly within the communications and cloud end-market, which accounts for 40% of its whole income.

The market reacted negatively to the earnings report, sending Sanmina’s inventory worth down by nearly 15% the subsequent day. On this article, we wish to look at if the market is valuing Sanmina pretty and if there are any hidden alternatives for worth creation or not.

Sanmina is a Area of interest Participant within the EMS Market

Sanmina operates in a extremely aggressive and cyclical EMS market, the place it faces sturdy competitors from different EMS producers, reminiscent of Jabil (JBL), Flex (FLEX), and Celestica (CLS). As you may see beneath, Sanmina has the worst 1-year worth efficiency in comparison with its EMS friends (-30%)

Taking a look at Sanmina’s enterprise efficiency and its place within the EMS market, we predict that Sanmina is a Area of interest participant. One attribute of a Area of interest participant is that it’s unfocused and doesn’t innovate or outperform others (as per Gartner) and that is precisely what we’re seeing with Sanmina.

We imagine that Sanmina’s poor worth efficiency is because of its underperformance and weak progress prospects. The market doesn’t assume that Sanmina can develop its enterprise.

CEO: $10B – $12B Income Goal in 3 Years

Within the earnings name, Sanmina’s CEO Jure Sola shared his imaginative and prescient for the corporate’s future and said that their inside purpose is to achieve $10B to $12B in income in three years.

Jure Sola (CEO):

I simply wish to remind in my ready assertion, I stated, hey, we’ve a purpose internally to develop this firm so much greater than what we’re right now. And our — as I discussed, we — within the subsequent 3 years, we count on to be within the vary $10 billion to $12 billion. So we’re targeted on progress, however we’re going to ensure it is essentially the most worthwhile progress.

He additionally added that the corporate is positioned very properly in all of the segments and that it has plenty of upside potential, particularly within the vitality, auto, medical, and protection and aerospace segments.

We wish to verify how sensible this progress aspiration is. We all know that Sanmina’s revenues are anticipated to say no throughout the first half of 2024. Analysts 2024 income estimation is $8B (-10% YoY) and 2025 estimation is $8.9B (+12%).

We imagine that Sanmina’s progress relies upon extra on the macro surroundings, so if 2025 and 2026 could be favorable years for the semi-industry, Sanmina may develop to the low-end of its aspiration goal which is $10B. Mainly, the 3-year CAGR for Sanmina will likely be 4% which is simply above the yearly US inflation goal. We see this state of affairs as the perfect case for Sanmina until it develops a greater enterprise technique or transformation.

Sanmina’s Diversification Technique: A Energy or a Weak point?

Sanmina claims to have a diversified portfolio of services throughout totally different segments (see beneath). Nonetheless, this technique might not be working for the corporate.

One of many challenges of diversification is that it may possibly dilute the corporate’s focus and competitiveness in particular markets. Our view is that the corporate doesn’t have the mandatory capabilities and focus to excel in any of the a number of finish markets it serves, every with totally different dynamics. By providing a broad vary of end-to-end contracting companies throughout varied end-user markets, Sanmina finds itself thinly unfold. When in comparison with extra succesful rivals in every end-market, the corporate struggles to realize the identical stage of progress. For instance, Sanmina’s income within the Industrial/Medical/Protection/Aerospace/Automotive section accounted for 65% of its income in This fall 2023. These are all high-growth industries that means they need to drive vital progress. However Sanmina’s income on this section slowed right down to 2.5% YoY progress which suggests it’s dealing with sturdy competitors from extra succesful gamers.

We imagine that Sanmina must undertake a extra strategic diversification strategy if it needs to develop its enterprise. The corporate ought to determine its strengths and will diversify solely into markets or applied sciences which can be aligned with its core competencies. This might complement and improve its current core portfolio fairly than diluting it.

The Positives: Growing Margins, Wholesome Steadiness Sheet

Regardless of the earnings miss and the projected income decline for FY2024, Sanmina additionally reported some constructive numbers in its This fall outcomes. The corporate improved its non-GAAP revenue margin from 7.9% to eight.7% YoY and non-GAAP working margin elevated from 5.3% to five.7% YoY. This exhibits firm is executing with self-discipline and demonstrating operational effectivity. The corporate margins appear to be in a great trajectory as you may see beneath:

When it comes to the stability sheet, the corporate generated a free money movement of $39 million in This fall totaling $45 million for the complete yr. Sanmina additionally decreased debt to $338 million, leading to a really low debt-to-cash ratio of 0.51x. With $668 million in money, $338 million in debt, and $1.53 billion in liquidity, Sanmina maintains a really wholesome stability sheet.

Valuation

Primarily based on the analyst consensus estimate for fiscal 2024, Sanmina’s present worth implies a ahead P/E ratio of 9.9x, considerably beneath its five-year historic common of 12.8x (-23%). Moreover, the present enterprise worth of $2.26 billion implies a ahead EV/EBIT ratio of 5.13x, which is 25% beneath the five-year historic common of 6.9x.

Making use of the 5-year common P/E ratio to the present EV offers us a worth goal of $60. We predict it is a honest valuation for the corporate, because it has improved its working margins to their highest stage in twenty years.

Dangers

• The corporate faces sturdy competitors in a risky {industry}. It has to compete with main world contract producers like Jabil who’ve superior provide chain administration capabilities, and really superior expertise utilization.
• The corporate will not be resilient sufficient by way of provide chain. It depends on a variety of exterior events to supply and produce its merchandise, which can be disrupted by geo-political occasions or macro slowdowns.

Conclusion

Sanmina faces challenges in its enterprise, reminiscent of an inefficient progress technique and a powerful aggressive surroundings. We predict that the market has mirrored these elements within the valuation of Sanmina. Nonetheless, Sanmina additionally has some constructive facets that aren’t captured by its present worth. It has a really sturdy stability sheet and its operational efficiencies proceed to enhance its margins each quarter. We predict this margin enchancment development will drive its valuation increased even when its income doesn’t develop.

In conclusion, there are constructive elements in Sanmina’s enterprise and we see it as a great worth funding. We price Sanmina as a Purchase.