Sanmina has been on fire lately. In the past six months alone, the company’s stock price has rocketed 48.6%, reaching $113.20 per share. This performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Sanmina, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Sanmina Will Underperform?
Despite the momentum, we're swiping left on Sanmina for now. Here are three reasons why SANM doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Sanmina grew its sales at a sluggish 2.9% compounded annual growth rate. This was below our standards.
2. Low Gross Margin Reveals Weak Structural Profitability
For industrials businesses, cost of sales is usually comprised of the direct labor, raw materials, and supplies needed to offer a product or service. These costs can be impacted by inflation and supply chain dynamics in the short term and a company’s purchasing power and scale over the long term.
Sanmina has bad unit economics for an industrials business, signaling it operates in a competitive market. As you can see below, it averaged a 8.2% gross margin over the last five years. Said differently, Sanmina had to pay a chunky $91.79 to its suppliers for every $100 in revenue. 
3. EPS Took a Dip Over the Last Two Years
Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.
Sadly for Sanmina, its EPS and revenue declined by 3.8% and 6% annually over the last two years. We tend to steer our readers away from companies with falling revenue and EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, Sanmina’s low margin of safety could leave its stock price susceptible to large downswings.
Final Judgment
We see the value of companies helping their customers, but in the case of Sanmina, we’re out. After the recent surge, the stock trades at 16.5× forward P/E (or $113.20 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better stocks to buy right now. We’d recommend looking at a top digital advertising platform riding the creator economy.
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