Investments In US And India Will Upgrade Cloud Technology

Key Takeaways

• Targeted investments in technology and capacity in key regions are expected to drive future revenue growth and improve operational efficiencies.
  
• Focus on high-margin sectors like defense and aerospace could enhance gross and operating margins through higher-margin profiles.
  
• Tariffs, geopolitical risks, and competitive pressures threaten margins and growth, with delayed projects and inventory challenges impacting revenue and investment capacity.

Catalysts

Provides integrated manufacturing solutions, components, products and repair, logistics, and after-market services in the Americas, the Asia Pacific, Europe, the Middle East, and Africa.

• Sanmina is making targeted investments in capacity and technology across the U.S., India, and Mexico, which should drive future revenue growth and enhance operational efficiencies, potentially leading to improved margins.
  
• Expansion in emerging markets and adding capacity for high-growth areas like data centers in India is expected to increase revenue from new and existing customers while also enhancing operating income through economies of scale.
  
• The company is focusing on high-margin end markets, such as defense and aerospace, which can improve their gross and operating margins due to the typically higher-margin profiles in these sectors.
  
• Emphasis on expanding capabilities in cloud infrastructure and data centers, including rack integration and high-performance network systems, positions Sanmina to capture more market share and increase revenues, potentially boosting EPS as demand from cloud service providers grows.
  
• Strategic cost management, strong cash flow, and a disciplined capital allocation approach, including share buybacks, are expected to enhance earnings per share and improve return on investment.

Sanmina Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sanmina's revenue will grow by 7.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.1% today to 4.3% in 3 years time.
• Analysts expect earnings to reach $417.0 million (and earnings per share of $6.91) by about May 2028, up from $242.2 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 12.4x on those 2028 earnings, down from 17.4x today. This future PE is lower than the current PE for the US Electronic industry at 20.0x.
• Analysts expect the number of shares outstanding to decline by 3.59% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.43%, as per the Simply Wall St company report.

Sanmina Future Earnings Per Share Growth

Risks

• Tariff uncertainties pose a significant risk, as the potential impact on customer demand and increased costs could affect revenue and net margins if tariffs are realized.
  
• A key customer program was delayed, highlighting the risk of unforeseen disruptions in project timelines, which could negatively affect revenue streams in the short term.
  
• The competitive landscape in technology markets, particularly in areas like high-performance network solutions and data centers, could put pressure on margins and limit revenue growth as other players intensify efforts in these areas.
  
• The ongoing geopolitical environment and potential shifts in customer production preferences might strain resources, requiring additional investments, and pose a risk to maintaining operating margins.
  
• Inventory management challenges and the need to build up stockpiles for future growth may affect cash flow and working capital, which could impact the company's ability to invest elsewhere efficiently.

Valuation

• The analysts have a consensus price target of $88.5 for Sanmina based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $9.6 billion, earnings will come to $417.0 million, and it would be trading on a PE ratio of 12.4x, assuming you use a discount rate of 7.4%.
• Given the current share price of $78.7, the analyst price target of $88.5 is 11.1% higher.
• 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.