Summary
- Tech company Sanmina Corporation provides comprehensive production solutions, components, finished items, repairs, logistics, and support globally.
- Over the past year, the stock is up 58%, and its momentum is 63.13%, compared to the S&P 500's -8.59%. Technology sector demand drove good outcomes.
- The company has significant growth potential and is undervalued, which justifies a buy recommendation.
Investment Thesis
Sanmina Corporation ( SANM ) operates in the tech industry. It serves clients worldwide by offering turnkey production solutions, components, finished goods, repairs, logistics, and support services. Concept creation, detailed design, prototyping, validation, pre-production, manufacturing design release, and product industrialization are all services provided by the firm's in-house engineers and designers.
SANM stock has performed well over the past year, rising by about 58%; the company's momentum is 63.13% compared to -8.59% for the S&P 500, indicating that it is performing better than its peers. The good results can be attributed to the high demand from the technology sector. To maximize the strong demand, the company has diverse revenue streams, which I believe are key in exploiting the strong demand in the market. The company's balance sheet is solid, which bodes well for the company's future growth. The relative valuation metrics indicate the company is undervalued, so I rate it a buy.
Demand for Consumer Electronics is Fueling Growth
SANM management credited the high demand in the market for the company's success after it posted great financial results in the MRQ.
"Please turn to Slide 7. Q1 IMS revenue increased to $1.94 billion, an increase of 7.7% over the prior quarter, primarily due to strong customer demand and continued improvements in the supply chain." - Kurt Adzema
In response to the management's comments, here is my market position assessment. The projected CAGR for the global flexible electronics market is 11.8%, from $24.07 billion in 2021 to $26.92 billion in 2022. At a CAGR of 14.3% from 2018 to 2026, the market for electronics is projected to reach $45.88 billion. Increasing consumer demand for electronics is vital in developing the flexible electronics industry.
The mobile gaming industry is evolving alongside advancements in technology. Both technological advances and the rising trend of mobile gaming technology are bolstering demand. Project Call 7.0 (PC 7.0), issued in 2022 by NextFlex, America's Flexible Hybrid Electronics (FHE) Manufacturing Institute, seeks to fund initiatives that enhance the development and deployment of FHE while tackling important difficulties in advanced manufacturing and supporting DOD priorities.
As a result of this demand-driven growth, I anticipate SANM will be able to take advantage of the situation, mainly owing to its diverse sources of revenue, and boost its revenues and profits.
Diverse Revenue Streams: Distributing Risk
My opinion is that the company's ability to generate income from a wide variety of sources is one of its strongest suits, as this has allowed it to better capitalize on market opportunities by serving a more diverse set of customers. Due to this diversity, the loss of any revenue stream would have much less of an impact on the organization than it would have been if they had a single stream. We base this on the idea that simultaneous shocks to all streams are highly improbable. Take a look below to see how each main revenue stream fared in the MRQ.
- The Industrial, Medical, Defense, and Automotive segments brought in $1.345 billion, which was a growth of 4.5% from the previous quarter and 27.5% from the prior year.
- For Communication Networks and Cloud Infrastructure, they brought in $1.01 billion. This increased 11% from the previous quarter and 44.6% from the previous year.
In total, they made $2.361 billion in their first quarter. It was good organic growth, with a 7.2% increase from one quarter to the next and a 34.4% increase from one year to the next. For the first quarter, 50.6% of their income came from their top 10 customers. When I look at this revenue distribution, I can confidently say that it is well-balanced, which means that risk is being spread out evenly if one revenue source becomes inoperable for whatever reason.
Robust Balance Sheet: Buffer Against Adverse Economic Climate
The strength of SANM's financial position is also noteworthy. SANM is in a very secure financial position, with short-term assets ($4.4B) that well outweigh its short-term obligations ($2.6B) and long-term liabilities ($548.4M).
Wall Street
It has more cash on hand than it owes, and the debt-to-equity ratio has decreased from 37.5% to 15.8% in the last five years. Its current debt is well covered by operating cash flow (87.5%), making it a very stable company in terms of debt coverage. The interest payments on SANM's debt are well covered by its EBIT (19x coverage), so there is almost no chance it will default on its debt.
Wall Street
With its levered FCF trailing at $118.84M and its cash flows from operations following at $299.78M, the company's favorable cash flows complement its excellent liquidity position. This encapsulates the firm's robust balance sheet, which in my opinion, acts as a cushion against a challenging economic environment.
Valuation
All valuation metrics, with the exception of PEG, show that SANM is trading at substantial discounts to industry medians, indicating that the stock is undervalued relative to its peers.
Seeking Alpha
To complement this assertion, a DCF model by finbox shows that the company is trading below its fair value.
The model estimates a $77.73 per share fair value for the company, which is 20% more than the current price of $63.92. This cheap valuation allows interested parties to buy into a growing company at a reasonable discount.
Conclusion
SANM is an up-and-coming company with a diverse revenue stream, allowing it the flexibility to maximize the varied client base in the tech industry. With demand for tech products on the rise, this company is in an excellent position to exploit the market following its diversity. Additionally, the company has a very robust balance sheet which I believe is a reliable buffer against an adverse economic climate. For these reasons, I am bullish on this stock and rate it a buy due to its undervaluation. Potential investors seeking to diversify their tech industry portfolios can consider this promising company at a discount.
For further details see:
Sanmina: Robust Balance Sheet, A Buffer Against Economic Downturn