Summary
- During the Dotcom bubble, Sanmina saw its stock price soar to an impressive height of over $300 per share!
- Unfortunately for shareholders, this surge was short-lived as the bubble eventually burst and the inflated valuations of tech stocks crashed.
- Where will shares go from here? Is Sanmina bound to repeat history? Or can it chart a course of its own building on recent strength?
Introduction
Sanmina Corporation ( SANM ) is a leading electronics manufacturing services provider headquartered in San Jose, California. The company specializes in serving original equipment manufacturers in the communications and computer hardware fields, focusing on printed circuit boards and backplanes.
As companies worldwide modify their supply chains there will be winners, and there will be losers. Let's take a look to see how Sanmina is positioned and if they build on prior success.
During the Dotcom bubble, Sanmina saw its stock price soar to an impressive height of over $300 per share! Unfortunately for shareholders, this surge was short-lived as the bubble eventually burst and the inflated valuations of tech stocks crashed.
The Great Financial Crisis saw Sanmina's stock price plummet to less than $2 per share and the prices stayed low for several years after the crash. However, lately, the shares have been on the rebound and have experienced a 64% increase over the last year.
Within this article, I’ll provide an update on their Q1 financial performance, analyze their financial performance, and provide a commentary as to where shares could go from here.
Q1 Update
Sanmina Corporation recently reported its Q1 2023 financial results and outlook for Q2 2023. The company had revenue of $2.36 billion, a GAAP operating margin of 5.2% and GAAP diluted EPS of $1.48. On a non-GAAP basis, the operating margin was 5.8% and diluted EPS was $1.64. The CEO attributes the strong performance to demand and solid execution. For 2023, the company forecasts revenue between $2.2-$2.3 billion, with GAAP diluted earnings per share between $1.30-$1.40 and non-GAAP diluted earnings per share between $1.50-$1.60.
Despite the positive guidance, the company cautions that actual results could be impacted by ongoing supply chain constraints, geopolitical uncertainty, and the COVID-19 pandemic.
Supply Chain Challenges
Due to recent events such as Russia's invasion of Ukraine, sanctions imposed on Russia, and pandemic-related shutdowns in China, electronic manufacturers like Sanmina are facing difficulties with the localization of their global supply chains.
These events, along with the China-U.S. trade war and other disruptions caused by pandemics and climate change, are driving Western companies to reduce their reliance on China for components and finished goods and on Russia for transportation and raw materials and to adopt more local or regional sourcing strategies.
The impact of the Ukraine war has further revealed the risks associated with the current global supply chain, leading companies to reconsider the risks associated with international suppliers and to consider purchasing more locally, even if it comes at a higher cost.
It may take a lot of effort and time for companies to secure their supply chains therefore ongoing disruptions are still likely in my view. Such changes may make forecasting demand more difficult for Sanmina making it important for investors to keep an eye on the company’s inventory levels until things stabilize. All things considered, so far, it’s my view they’ve managed the crises quite well.
Focusing on Growth
Last year, to continue on its path of growth Sanmina made inroads in the lucrative Indian market by partnering with Ambani’s Reliance Industries.
The joint venture aims to create a world-class electronic manufacturing hub in India and will prioritize high-tech infrastructure hardware across various industries. RSBVL (Reliance) will hold a 50.1% equity stake in the joint venture and Sanmina will hold the remaining 49.9%. The joint venture will be capitalized with over $200 million and will be managed by Sanmina's existing management team in Chennai.
India is one of the fastest-growing markets for IT and this partnership is a strategic move that should help them capitalize on this growth. The Indian government has been promoting the "Make in India" initiative and this joint venture aligns with that vision by partnering with a strong local player.
By leveraging Sanmina's expertise in advanced manufacturing and Reliance's leadership in the Indian business ecosystem, the joint venture will support the product development and hardware start-up ecosystem in India, as well as promote research and innovation of leading-edge technologies.
Financials
Revenue and Earnings Growth
Over the past decade, Sanmina has seen substantial growth in both revenue and earnings. The company has recorded an increase in revenue by over 40%, while earnings per share have doubled! Seeing EBITDA growth outpace revenue growth is a nice signal that the company may be shifting to a more profitable product mix.
Margins
The company's gross margins have remained stable, ranging between 7% to 8%, however, its EBITDA margins have grown significantly from the mid 3% range to nearly 6%. This expansion has had a significant impact on the company's operational efficiency, boosting margins and returns for shareholders.
ROIC
Sanmina’s returns on invested capital have remained stable at a low double-digit rate, with a recent reading of 11.57% in the past year according to YCharts. These metrics, while considered average compared to the stock market's average return of 10% in the long term, are positive nonetheless.
You could do a lot worse than an 11% return batting average.
Valuation
Shares currently trade around a 14x PE ratio which is relatively in line with where they traded 3 years ago. Compared to most of its peers Sanmina trades at one of the lowest forward PE ratios at just 7.3x FY 3 earnings. That's a 13.6% earnings yield!
SANM | ( FN ) | ( PLXS ) | ( MEI ) | ( CLS ) | ( TTMI ) | |
---|---|---|---|---|---|---|
P/E Non-GAAP (FY1) | 10.08 | 15.95 | 18.07 | 17.90 | 6.65 | 12.99 |
P/E Non-GAAP (FY2) | 8.95 | 14.49 | 14.93 | 15.30 | 6.15 | 9.90 |
P/E Non-GAAP (FY3) | 7.33 | 13.00 | 13.80 | 12.93 | 5.58 | - |
Source: Seeking Alpha
Conclusion
Sanmina has been successfully navigating the challenges posed by recent geopolitical events and the COVID-19 pandemic. The company is taking measures to secure its supply chain and is seeking further growth opportunities through its joint venture with Reliance Industries in India. Over the past decade, Sanmina achieved awe-inspiring growth in revenue and earnings, while growing its margins and maintaining moderately strong returns on invested capital.
Despite ongoing disruptions, the company has demonstrated resilience and remains well-positioned for future growth. With shares trading at a P/E ratio of less than 15, they may offer good value for investors looking to accumulate shares at these levels even after the recent share price run-up.
I rate Sanmina a “Buy”.
For further details see:
Sanmina: At Less Than 15x P/E, This Stock Is A Buy