Sanmina’s Earnings Preview

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Electronics manufacturing services provider Sanmina (NASDAQ: SANM) will announce fiscal first-quarter (ended in December) results on Wednesday, January 16th. Analysts are expecting share earnings of $0.34, versus the prior-year tally of $0.28. Formerly Sanmina-SCI, the company’s stock has had a resurgence over the past six months.

A challenging revenue environment

December-period revenue was likely between $1.5 billion and $1.55 billion, compared with the December 2011 figure of $1.50 billion. Sales to Sanmina’s largest end market, communications networks, are pegged to decline somewhat due to weak demand for its wireless access infrastructure offering. Elsewhere, revenue from the computing and storage industry was likely up slightly in the quarter.

Management is focused on increasing its proportion of communications and computing/storage revenue in addition to boosting its presence in underserved sectors by outsourcers. In particular, defense and aerospace equipment producers are increasingly farming out these processes as a means of reducing costs. Those revenues were probably only flat year over year in the December quarter, but are on pace to grow in the near term.

Furthermore, industrial-related revenues are apt to advance, given the solid project pipeline. Sales to another emerging outsourcer, the medical market, should be stable or pick up somewhat. Finally, multimedia revenues were up a bit probably, while semiconductor revenues slipped. We believe Sanmina derives a modest percentage of revenues from the clean technology and automotive industries.

The customer base

Sanmina’s 10 largest customers contributed 50% of fiscal 2012 sales. Notably, its largest client last year, at about 10% of the total, was the struggling French networking equipment provider, Alcatel-Lucent (NYSE: ALU). ALU has been operating in the red. Still, Alcatel’s outlook is improving and risk-tolerant investors may want to take a chance that the shares will be a major recovery story in 2013.

Segment-wise, Sanmina attributes more than 80% of its top line to integrated manufacturing solutions, including printed circuit boards (PCBs), optical and radio frequency modules, final system assembly and testing, and direct order fulfillment. The remainder consists of components, products, and services revenues, namely design, logistics, and repair services.

One of Sanmina’s larger competitors, Flextronics International (NASDAQ: FLEX) has also been experiencing a slowdown in demand from its top telecom networking customers, attributing macro-economic sluggishness for the trend. Like SANM, FLEX may well see a bounceback this year in that category. FLEX shares offer upside potential for the next 12 months.

Restructuring plan

A primary reason EMS stocks may trade at low P/E multiples is the companies’ frequent restructurings. Nevertheless, such initiatives can have long-term positive impacts on earnings, by way of expanding lower-cost manufacturing footprints.

Indeed, SANM recently stated plans to close two facilities, including a PCB plant in Malaysia. Costs of roughly $23 million are expected to be incurred over the course of this year. The payback period for the closings is likely to be six to nine months.

What to look for

In light of the factors discussed, when SANM releases results, there are three issues to review: 1. The climate for the communications and computer/storage markets. 2. Where business is growing, be it the defense, medical or another end market. 3. Progress on the downsizing of the PCB unit and its effect on profitability.

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