AI And Cloud Expansion Energizes Growth And Sharpens Profits

Key Takeaways

• Sanmina anticipates revenue growth and improved margins through diversification, acquisition of new customers, and investments in high-margin programs.
  
• Strategic expansion in AI architecture and cloud data centers aims to drive revenue growth and enhance operational efficiencies.
  
• Strategic investments in a competitive cloud and AI market, alongside risks from customer inventory levels and the Indian joint venture, impact future revenue growth.

Catalysts

Provides integrated manufacturing solutions, components, products and repair, logistics, and after-market services worldwide.

• Sanmina expects fiscal year 2025 to be a growth year with high-single-digit revenue growth projected, driven by new and existing programs, diversification into target markets, and acquisition of new customers. This should positively impact revenue.
  
• The company is anticipating margin expansion, with non-GAAP EPS expected to grow faster than revenue. This improvement should result from new programs with higher margin opportunities, increased manufacturing efficiencies, and operational expense leverage. It will directly enhance net margins and earnings.
  
• Sanmina's strategic focus includes expanding its presence in the AI architecture space, which is rapidly increasing new opportunities, particularly in the communication networks and cloud infrastructure segments. This should drive revenue and contribute to higher growth rates in those areas.
  
• Sanmina is heavily investing in its cloud data center capabilities as an end-to-end solution provider, positioning itself well in the market for future growth. This should bolster both top-line revenue and support margin expansion through increased efficiencies and economies of scale.
  
• The company has demonstrated strong cash flow generation and plans to continue strategic investments in its business to support long-term financial objectives. This should translate into better financial stability, stronger net margins, and enhanced earnings potential.

Sanmina Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sanmina's revenue will grow by 7.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.9% today to 4.1% in 3 years time.
• Analysts expect earnings to reach $384.5 million (and earnings per share of $6.51) by about November 2027, up from $222.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.3x on those 2027 earnings, down from 18.9x today. This future PE is lower than the current PE for the US Electronic industry at 23.4x.
• Analysts expect the number of shares outstanding to grow by 2.64% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.23%, as per the Simply Wall St company report.

Sanmina Future Earnings Per Share Growth

Risks

• The lower revenue base during FY 2024 indicates a potential risk if the company cannot sustain growth momentum, which could negatively impact total revenue in the future.
  
• Despite a 20 basis points improvement in non-GAAP gross margin, operating margin has declined due to targeted investments, which may put pressure on net margins if growth does not materialize as expected.
  
• The visibility into future revenues largely depends on customer inventory levels, which pose a risk of revenue fluctuations if further inventory corrections are needed, impacting earnings consistency.
  
• Although the company has plans for strategic investments and growth, there is substantial competition within the cloud and AI markets, posing a risk to future market share and revenue growth.
  
• The joint venture in India (with Reliance) involves execution risk as expansion plans may face unforeseen challenges, affecting potential revenue growth and partnership returns.

Valuation

• The analysts have a consensus price target of $70.33 for Sanmina based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $84.0, and the most bearish reporting a price target of just $58.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $9.5 billion, earnings will come to $384.5 million, and it would be trading on a PE ratio of 13.3x, assuming you use a discount rate of 7.2%.
• Given the current share price of $76.94, the analyst's price target of $70.33 is 9.4% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.