Sanmina Corp. is the new investors’ darling of the contract manufacturing industry. Its stock price has surged at a double-digit clip in recent days despite tepid sales growth and amidst continuing signs visibility into end-markets remain limited. What accounts for this disparity? Sanmina isn’t exactly the same company it was only a few years ago. Following years of reorganization the image that is beginning to emerge is that of an enterprise rapidly shedding unprofitable operations and embracing higher-margin businesses with a more stable revenue stream, according to company executives and financial analysts.
The company’s sales fell year-over-year in the recently ended fiscal 2015 third quarter and inched up sequentially but shareholders were not only happy with Sanmina’s performance but appeared delighted with its outlook. This optimism is anchored on the realization that efforts to diversify revenue flow at the electronics manufacturing services (EMS) provider have begun paying off and the future is looking much better, according to Sanmina executives.
“Overall, [the fiscal third quarter] was a good quarter where our diversification over the last few years really paid off,” said Robert Eulau, Sanmina’s CFO, during a conference call with analysts to discuss the recent results. “We will continue to diversify our revenue base to position ourselves solidly for the future. The cash generation was excellent for the second quarter in a row. Growth continues to be our number one objective but it is imperative that we grow with the right kind of profitable business.”
Even analysts who typically are skeptical about the margin-challenged EMS industry are backing up Sanmina’s positive outlook. A few of them upgraded the company’s stock rating, noting the downside risk for the company in the near future remains limited. The management’s execution of previously discussed reorganization plans also came in for a positive endorsement from analysts at Longbow Research in a report.
"While wireless communication weakness is playing out in-line or worse than we had anticipated given a meager view on FY4Q (Sep), Sanmina is seeing better operational execution and mix along with upside in storage, networking, optical, and auto muting the impact," said Joe Wittine, an analyst at Longbow. "Although wireless communication demand disappointed, confirming our checks, Sanmina saw upside in storage (cloud projects) and auto, growth in industrial and medical, and stable to modest growth in networking and optical."
Sanmina executives said the company’s financial performance stabilized in the recent quarter as it built on gains from reorganization actions taken over the last years. Contributions to sales from the weak communications equipment market declined almost 3 percent in the quarter ended June, to 37 percent, while the industrial, defense and medical markets’ share of companywide sales rose to 41 percent, up 3.2 percent, according to Jure Sola, chairman and CEO of Sanmina. The company expects contributions from industrial, medical and defense to remain strong in the ongoing quarter, Sola said during the conference call.
“We invested a lot of energy in the last few years diversifying the company, especially in industrial, medical and defense,” Sola added. “In the industrial and medical sides we did a really good job. The good thing is that we still have an opportunity to continue to expand and grow in that market. It takes a little bit longer to get into those type of customers but once you get them, as long as you're executing well, the relationship lasts for many years.”
Sanmina began diversifying operations to reduce its exposure to fickle end-market such as PCs and communications equipment more than two years ago. Those efforts initially resulted in a decline in the company’s annual sales, which fell to $5.9 billion in the fiscal year-ended Sept. 28, 2013, from a high of $6.6 billion in fiscal 2011. Revenue rose in fiscal 2014 to $6.2 billion. Profits recovered ahead of sales, however, as “unusual expenses” declined.
Revenue growth wasn’t stellar even in the recently concluded quarter. Sales fell 4 percent, to $1.5 billion, in the fiscal third quarter ended June 27, from $1.6 billion in the comparable quarter of fiscal 2014. Profits rose, though, to $24.5 million, or 29 cents per share, from $20.7 million, or 24 cents per share, buoyed by lower interest expense and a $2.8 million gain on the sales of long-lived assets. Restructuring costs in the latest quarter rose, however, to $7.7 million from $2.3 million in the year-ago quarter.
The fiscal year comparisons are much better and reflect the improvements the company has noted in its operations. Revenue during the first nine months of the year climbed to $4.7 billion from $4.5 billion in the first nine months of fiscal 2014. Analysts polled by Yahoo forecast Sanmina’s revenue for fiscal 2015 would be approximately $6.28 billion, flat to slightly higher than the $6.22 billion it reported in the prior fiscal year.
The company is itself projecting September quarter sales would be in the range of $1.55 billion to $1.65 billion, according to Eulau, the CFO, who described the 3-month period as “an unusually challenging quarter,” because it contains 14 weeks. During the period, Sanmina expects additional shipments, offset by fixed costs related to employee compensation. Even this won’t necessarily wipe out the gains from product diversification, Eulau said.
Overall, Sanmina executives appear positive about the company’s financial outlook. They insist this is because its business profile has changed even while acknowledging they will continue to fine-tune the product mix and decrease its exposure to lower-growth segments of the electronics market. The goal is to push revenue above the current $6 billion annual rate as quickly as possible even while hedging against lower-growth businesses, they said.
“If we’re strictly trying to be a $6 billion-plus company it wouldn’t be very exciting,” Sola said. “We have been positioning the company for the right [and] bigger growth in the last couple of years. I think we did some positive stuff. I am disappointed with some of the growth but I’m very happy with the quality of the growth that we got and how well we diversified into the right customers for the future. We definitely want to be a lot bigger company than $6 billion-plus. I think we can do a lot, unless the economy really goes the wrong way. But as long as the economy stays with us, I think we can do a lot in the next couple of years.”