Sanmina Corporation's (NASDAQ:SANM) Shares Bounce 26% But Its Business Still Trails The Market

Sanmina Corporation (NASDAQ:SANM) shareholders have had their patience rewarded with a 26% share price jump in the last month. Notwithstanding the latest gain, the annual share price return of 6.5% isn't as impressive.

Even after such a large jump in price, Sanmina may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 13.4x, since almost half of all companies in the United States have P/E ratios greater than 18x and even P/E's higher than 33x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Sanmina certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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Is There Any Growth For Sanmina?

The only time you'd be truly comfortable seeing a P/E as low as Sanmina's is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 3.4% last year. Pleasingly, EPS has also lifted 120% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 0.2% as estimated by the three analysts watching the company. With the market predicted to deliver 10% growth , that's a disappointing outcome.

In light of this, it's understandable that Sanmina's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From Sanmina's P/E?

The latest share price surge wasn't enough to lift Sanmina's P/E close to the market median. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Sanmina maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Sanmina with six simple checks will allow you to discover any risks that could be an issue.

You might be able to find a better investment than Sanmina. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.