The list of Silicon Valley’s hottest technology companies just got an unlikely addition in Sanmina Corporation (NASDAQ: SANM). Shares of the San Jose-based electronic manufacturing services (EMS) provider ran as much as 38% on Tuesday after the company released fiscal 2024 first quarter financial results.
With nearby tech giant Meta Platforms stealing the spotlight with a blowout report of its own, Sanmina’s surge quickly became an afterthought. The mid-cap closed the week more than 12% off its $69.69 peak, making an already undervalued stock even less expensive.
Unlike Meta, which tripled its profits, Sanmina reported a 21% year-over-year earnings per share (EPS) decline — but it was a significantly better result than the 30% drop that Wall Street anticipated. Since recording a second straight quarter of 34% revenue growth a year ago, the company has witnessed a slowdown in demand primarily from communications customers. Sanmina makes and repairs broadband routers, switches and network infrastructure equipment for leading communications manufacturers. Customers have been absorbing excess inventories as America’s ambitious 5G wireless buildout recalibrates following a period when supply chain shortages caused overordering.
Nevertheless, the market awarded Sanmina for turning in a decent performance in a challenging macro environment — and for sticking with its fiscal 2024 second-quarter guidance. Management expects that the second-quarter financials will be similar to the first-quarter results (revenue and EPS declines of 19% and 21%, respectively) before things pick up in the back half of the year. Along with order booking trends that improved sequentially in Q1, this suggests that momentum will return to the business later this year.
What will drive Sanmina’s return to growth?
In recent years, Sanmina’s focus has been on highly regulated end markets such as utilities, medical groups and aerospace. Compared to consumer electronic devices (smartphones, PCs, tablets, etc.), these markets have performed relatively well during the U.S. economic downturn — allowing the company to maintain its profit margins despite the lower sales. As inventory issues get flushed out and the economy strengthens, it will be starting with a solid margin base that should translate to stronger EPS. As such, analysts are projecting 11% EPS growth in fiscal Q4 and 23% EPS growth in the first quarter of fiscal 2025.
To better position itself for a sustained turnaround, Sanmina recently shifted its business mix towards complex, mission-critical markets that tend to come with longer contracts. It has virtually no exposure to cyclical consumer spending and instead focuses on B2B customers that are sources of steady cash flow.
To this end, the company is targeting a 60%/40% split between high-margin industrial, medical, automotive and defense revenue and lower-margin (high volume) communications networking and cloud infrastructure revenue. Sanmina offers advanced networking solutions for cloud data centers. These are expected to be a reliable demand source as the global digital transformation unfolds.
What makes SANM undervalued?
In fiscal 2025, Sanmina is expected to generate 17% EPS growth from what’s likely to be a down year in fiscal 2024. The $6.50 consensus forecast is above fiscal 2023 earnings, which implies that the company will build off its strong performance of last fiscal year.
Based on Friday’s $61.14 closing price, SANM has a forward price-to-earnings (P/E) ratio of just 9x. This makes it an undervalued stock for multiple reasons. For starters, Sanmina is forecast to deliver 17% growth next year, rendering the 9x multiple futile. Over the last five years, SANM has commanded an average P/E of around 13x. A reversion to this average suggests that the stock can gravitate to the $80 to $85 range over time.
Now let's compare this valuation to the industry. The average forward P/E of the domestic electronic manufacturing services group is 23x. Sanmina’s P/E (9x) is the lowest. Its closest mid-cap peers — Plexus (16x), Celestica (11x), IPG Photonics (20x) and Fabrinet (23x) — have higher P/E ratios. Large caps Jabil, Flex and TE Connectivity are also more expensive.
