Sanmina Financial Analysis

Nicholas Starnes and Dustin Swift

April 8, 2015

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Sanmina Corporation

Background

Sanmina Corporation was founded in 1980 by Jure Sola and Milan Mandari as a

telecommunications equipment production company. In 2001, the company merged with SCI

Systems in Huntsville, AL, for $6 billion in debt, cash, and stock and became Sanmina-SCI.

Sanmina Corporation returned to its current name, dropping the hyphenated SCI add-on in

November of 2012 as part of a new branding strategy, which incorporated a simpler title to the

company and thus their services as well. Jure Sola, became CEO of Sanmina Corporation in

1991 and currently resides in this capacity even today. The company issued their IPO on April

23, 1993, and stands today as a fortune 500 company with approximately 44,000 employees in

25 different countries which are located across 6 continents worldwide. Sanmina Corporation

can be found as a publically traded company under the NASDAQ ticker symbol: SANM.

Other than their major merger with SCI Systems in 2001, Sanmina acquired two other

companies during the early 2000s as well. These much smaller acquisitions were priced at $100

million and $15 million; they included former companies such as: E-M Solutions and Viking

Interworks. These acquisitions along with massive growth in business, have allowed Sanmina

Corporation to expand their initial focus in the production of technology equipment for the

Telecommunications industry. Today, the company describes itself as an integrated

manufacturing services company and provides a great deal of support to Original Equipment

Manufacturers worldwide. Sanmina focuses on design, manufacturing, repairs, shipping, and

even delivery of their products through a command of complex supply chain resources. Their

market cap is $2.06 billion present day, with an enterprise value of $2.12 billion and a 40.35%

increase in stock price this year to set the current value at $24.35 per share. Seven Analysts

follow the security according to Yahoo Finance and Morning Star which include big names like:

Deutsche Bank, Needham, Argus, and Credit Suisse.

Sanmina also has an expertise in specific technologies which include but are not limited

to: backplanes, optical solutions, microwave and RF technologies, cables, advanced printed

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circuit boards, castings and plastics, machining, and even the design, construction, and

maintenance of enclosures. Sanminas major profiting industry of focus is still grounded in

Communications, which compose approximately 41% of the companys revenue, as indicated by

the graph below. The second most profitable industry group for Sanmina is Industrial, Medical,

and Defense, which accounts for 37% of the companys revenue in Q4 2014. An additional

breakdown of the chart shows sizable portions of revenue being 9% for Multimedia and 13%

Computing and Storage.

Graph from Sanmina's Website

Sanmina Corporation has 8 members that compose the Board of Directors, with Mr. Jure

Sola presiding as the current CEO. All the members of the board are insiders for the company.

Mr. Robert K. Eulau is the current Chief Financial Officer and Mr. Charles F. Kostalnick II

presides as the Chief Business Officer and Executive Vice President. Other notable leadership

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figures include Mr. Alan McWilliams Reid and Mr. Dennis R. Young, who are Executive Vice

President of Global HR and Exec. VP of Europe & Asia Sales respectively.

Sanminas CEO, Mr. Sola, is a major direct holder of shares for the company with

400,829 shares as of reported at the end of 2014. Ms. Jacqueline M. Ward, a member of the

Board of Directors, comes in second to Mr. Sola and owns 196,238 shares in the company as of

March 2015. Mr. Robert Euleau, the CFO owns 149, 754 shares in November 2014. Mr. Neil

Bonke, and Mr. Wayne Shortridge are the other two major holders in the company and are also

insiders from the Sanminas Board of Directors with a combined total of 91,635 shares owned.

In total, 2% of all Sanminas shares owned are by insiders and 5% owners with 96% of

shares being owned by institutions and mutual funds. 241 institutions hold the majority of

Sanminas shares with 36.54% ownership attributed to just the top 10 of these institutional

investors. Of these institutions, Smith-Donald & Company Inc. and Dimensional Fund Advisors

LP are the two largest blockholders for Sanmina Corporation with each firm holding 7,030,229

shares and 6,213,363 shares respectively. This makes percentage of ownership by shares to be

8.45% by Smith-Donald & Company Inc. and 7.47% by Dimensional Fund Advisors LP.

Capital Structure

Capital Structure for Sanmina Corporation can be seen for the last three years in the

yellow chart located below. The firms value is calculated with the formula:

= + +

Note also that the values of each variable are located within the description of data that is

represented in the chart for further simplicity. Sanmina Corporation would be considered to be a

part of the Diversified Technology Industry.

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According to this chart above, about the capital structure of Sanmina, the firm value (V)

has decreased from 2012 to 2013, but appears to increase in 2013 from approximately $1.75

billion to $1.79 billion. The fluctuation in firm value can be attributed to the simultaneous

decrease in long-term debt by 59.24% and an increase in the firms equity by 65.94% from 2012

to 2014.

In terms of how Sanminas capital structure compares with its industry, special care was

taken to select three other companies that were a part of the Diversified Electronics Industry

within the Technology sector. Benchmark, Jabil Circuit, and Plexus were chosen to be compared

alongside Sanmina to show a better picture of how the firms compared to one another within the

same industry. Sanmina was seen to be slightly above other firms capital structuring in terms of

preferred and common stocks. The three peer firms, had an average of $500,002,000.00 in

common stock for their 2014 balance sheets, however no firm, including Sanmina, had issued

any preferred stock at all. Sanminas common stock amount of $784,600,000.00 was

$284,598.00 more than the peer average rate. Furthermore, Sanminas long-term debt of

$490,300.00 was well below the peer average amount of $965,815,500.00 by $475,515,500.00 in

all. This information is shown along with the complete overview of the peer firms in the chart

below. Sanminas calculations are not included with the peer amount averages and Sanmina is

segmented by a different color in the chart to further emphasize that fact.

*Note that amounts are in

thousands USD

Amount Percent Amount Percent Amount Percent

Long-term Debt (D): 1,203,041.00$ 60.53% 644,480.00$ 36.89% 490,300.00$ 27.36%

Preferred Stock (P): -$ 0.00% -$ 0.00% -$ 0.00%

Common Stock (S): 784,600.00$ 39.47% 1,102,506.00$ 63.11% 1,302,002.00$ 72.64%

Firm Value (V): 1,987,641.00$ 100.00% 1,746,986.00$ 100.00% 1,792,302.00$ 100.00%

2012 2013 2014

Sanmina Corporation (NASDAQ: SANM) Capital Structure

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Also, Sanmina is seen here to have a share price of $25.12, which is below the peer

average of $30.19. Despite that fact, the share price of Sanmina should not be considered too low

in this analysis seeing that the very high price of Plexus (PLXS) at $42.14 per share is much

greater than the other securities which trade in the lower $20 per share range. Sanminas price

per share is the second highest amongst these firms. Sanmina is also seen barely lagging behind

the peer average of diluted shares outstanding, which is 94,454,000, by having 86,692,000 shares

itself.

Thus, Sanmina seems to be just about average to below average in terms of comparing its

capital structure to the peer firms listed here, which also represent a portion of the Diversified

Electronics Industry. One area where Sanmina seems to be the strongest, is how quickly the

company has been able to pay off large sums of its long-term debt. This fact makes the company

the second lowest debt holder shown in the chart here. Sanminas choice to aggressively

deleverage its own balance sheet is thanks to a strategy proposed by management a few years

prior. The companys leadership wanted to address the 13 year long debt-bloated image of

Sanmina and so they have made deleveraging their top priority. An advantage that Sanmina

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could gain from this tactic is the possibility to experience a substantial decline in the companys

interest expenses, as shown below.

From 2010 to 2014, Sanmina has seen a -71.52% decrease in interest expenses. We agree

that the companys approach to capital structure puts them on the right track of improvement

which would potentially allow them to outperform many of their competitors in the long-run.

From their deleveraging tactics so far, the company has increased their EBIT by approximately

26% in the last quarter, and EPS is up by 40% in fiscal year 2014. These improvements show a

mature company that has a command over their debt and equity; our recommendation is to

continue their tactic of deleveraging as to further avoid interest payments on debt cutting into

profits from growth.

Sanmina can however increase its firm value as indicated by the formula above, by

increasing its amounts of either preferred or common stock to raise capital, which would not

interfere with its current plan of eliminating debt.

Dividend Policy

Like the majority of the firms in the Diversified Electronics Industry that we have

analyzed so far, Sanmina has not issued any dividend at all. This made the figures relating to

Sanminas dividends very easy to calculate being that all figures equaled zero. Sanmina,

Benchmark, and Plexus are all exempt from these calculations about dividends, though Jabil

Circuit is the exception in the industry. According to the chart comparing these companies,

which is located below, Jabil Circuits figures are the only ones which influence the peer average

amounts found in the right-most column in the graph.

*Note all figures are in

thousands of USD

2010 2011 2012 2013 2014

Interest Expenses: $108,144 $99,114 $71,744 $41,004 $30,804

Sanmina Corporation Interest Expenses

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Sanminas choice to not issue dividends, even in present day, can be attributed to the

companys struggles with rapid growth, expansion, and past debt financing. With the companys

ambitious maturation process that has taken place since its founding, little time was wasted in

going from a small private firm in the 80s to the giant, multibillion dollar company it is today.

Needless to say, such expansion in Sanmina has caused the company to rely heavily on debt

financing as a means to show greater levels of stability on their balance sheet; this stability was

necessary as the company increased revenues and then turned around to invest them in various

projects, acquisitions, and even new branches of industries altogether. In short, Sanminas past

experiences with debt allowed the company to spend outside of what it would be comfortable

spending of its own revenues; however, this spending all showed to be very worthwhile in the

end. This is why Sanmina has shifted its focus to now paying off its debts and relying more on its

own value and profit earning power as a company.

Company Sanmina Benchmark Jabil Circuit PlexusPeer

Average

Sanmina SANM BHE JBL PLXS -

Share Price $ 25.12 $ 24.88 $ 23.56 $ 42.14 $ 30.19

Earnings Per Share: $ 0.26 $ 1.53 $ 0.98 $ 2.68 $ 1.73

Dividend Per Share: -$ -$ 0.32$ -$ $ 0.11

Payout Ratio: -$ -$ 0.22$ -$ $ -

Dividend Yield: 0.00% 0.00% 1.40% 0.00% 0.00%

Sanmina Corperation (NASDAQ: SANM) Dividend Comparison as of 2014

*Note that all amounts are in thousands USD EXCEPT for share prices*

*Note that Sanmina is omited from Peer Average Calculations*

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Sanminas dividend policy has thus been nonexistent, however, the firm does show an

interest in share repurchasing from time to time. In the past decade, only 12.1% of the firms free

cash flow returned in the form of share repurchases and not in dividends. This is indicated in the

chart below which shows the relationship between cash flow and repurchases from 2005 to

2014.

In analyzing Sanminas motivation for their dividend policy, we have concluded that this

tactic was the best policy in the past, for the company. However, for today, Sanmina should be

more focused on advertising their positive balance sheet leveraging tactics and overall company

growth to their investors. This can be done with the issuing of dividends since the company is

expected to have even greater cash reserves in the next year (approximately $600 million by

2012 2013 2014

Stock Price: 10.31$ 16.42$ 25.12$

Earnings Per Share: 0.10 0.26 0.26

Div idend Per Share: 0 0 0

Payout Ratio: 0 0 0

Div idend Yield: 0% 0% 0%

*Note that amounts are in thousands USD*

*Note that all amounts are from December of the year specified*

Sanmina Corporation Div idend Policy

Year: 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Free Cash Flow: $339,444 ($477,356) $397,579 ($82,213) $131,299 ($159,750) $127,334 $136,782 $241,939 $237,875

Share

Repurchases:$0 $0 $0 $0 $29,163 $759 $21 $305 $1,525 $76,237

Sanmina Corporation Share Repurchaces Over the Past Decade

*Note all figures are in thousands of USD*

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2016); increases in reserves are due to their approach to minimizing long-term debt and

increasing profits in the steady growth of Medical, Industrial and Defense areas of their business.

Our recommendation then is that Sanmina consider changing their current dividend

model to incorporate actually issuing dividends. Unlike the past, the company is very able to use

their own reserves to advertise market value and value for their company to the shareholders,

instead of paying off their many expenses accrued from growth and expansion. Sanminas

market price per share has already increased 131.23% in the past three years due to the special

attention they has given to cleaning up their balance sheet, however, now is the best time to take

advantage of this positive valuation in the market and issue dividends. This approach would also

affect the companys capital structure by allowing the continued deleveraging of debt (decrease

of long-term debt in the capital structure) and the increase in preferred stock amounts shown

above. With the proper amounts of preferred stock issuance eclipsing debt, firm value would be

shown to increase.

Growth

Graph from SeekingAlpha.com 1

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Over the last 3 years, Sanminas Communications Industry line of products have

decreased 6.25% in sales. Computing and Storage Industries have decreased 12.50 % in sales

numbers, and the Multimedia industry has decreased 18.33%. However, Sanminas lines of

business in the Industrial, Medical, and Defense industry sales have increased 29% from 2012 to

2014. Expected industry sales growth for the next three years will continue to follow these

current trends meaning that declines in the Multimedia, Computer and Storage, and

Communications will decline 3% annually for the next 3 years. This trend is calculated from the

current declining slopes seen from this charts data located on the previous page. Below is also a

graph which represents notable figures so far about Sanminas profit margin compared to its

industry and sector. Seen here, so far for 2015, Sanminas profit margin outperforms all other

peer figures.

In looking at growth internally, 100% of Sanminas growth in the past decade has been

from within the company itself, but this is not to say that acquisitions would stifle any hopes of

growth in the future. The company saw substantial growth from acquisitions in the early 2000s

by securing key patents and technology that smaller firms had as trade secrets; from our research,

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this tactic of external growth is not unique to Sanmina alone, but many companies in the

electronics industry follow similar methods to gain advantage. In saying that, Sanminas profit

margins this year so far seem to be massively outcompeting the competing its own industry and

sector by leaps and bounds. This is to point out that numbers so far support our analysis that

Sanmina will continue to be profitable and only increase their revenues and growth in the next

few years, and will slow down in growth within the next five years to eventually see a negative

growth in EPS as indicated by the Yahoo Finance Analyst Information graph also seen in the

Stock Outlook section of this paper. Reference for this figure.

Liquidity Policy

The liquidity of Sanmina has drastically improved over the past five years, with levels of

change in the last three years being even more critical for the valuation of the company. With

respect to the current ratios change from 2010 to 2014, a 58.18% increase has been shown for

Sanmina. This ratio is important because it shows the short term financial liquidity of the firm

and how it has evolved. All ratios for Sanmina have seen to increase partially due to the fact that

the company has aggressively deleveraged its balance sheet within the timeframe analyzed,

however, increased levels of assets for the firm can be responsible for this augmentation as well

In a comparison of Sanmina against its industry, it seem to be below average on every

level, however it should be taken into account that Benchmark has seen large levels of

deleveraging like Sanmina, but in greater quantities. This fact can make the industry comparison

results for Sanminas peer companies super augmented and should be taken with precaution in

Sanminas overall evaluation. The improvements seen by Sanmina in the past five years arguably

put the company in better standing than it has ever been in terms of liquidity, however this is still

one area of improvement the company still needs to address. In relation to its sector, many

companies that are juggernauts of the tech world can hyper augment data (such as Apple or

Google). This should be taken into consideration when analyzing just how below average

Sanmina performs against this group.

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We agree with Sanminas current improvements in liquidity policy, however we also see

that the company has a lot more room to grow here. We recommend to continue to improve the

cash ratio to be at least 1.0 since this would indicate the firms ability to pay of short-term debts

easily. Their change in liquidity policy could also spell increased market and shareholder

valuation for the firm.

Stock Outlook

Below are the stock prices for Sanmina and its competitors for the last 5 years. Sanmina has outperformed

the industry with an increase in its price per share being up 133.32%. Jabil Circuit, which is second to

Sanmina in terms of market price per share growth, only experienced a 36.45% increase from 2012 to

2014. In this snapshot of past performance of share price, Sanmina seems to be valued more in the market

than its peers, and analysts seem to point toward the idea that the company will maintain this path.

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According to Yahoo Finance, this growth in stock price puts Sanmina currently in a good position

with other industry figures for comparison, however, in the scope of our own evaluation, Sanmina is

doubly performing the securities listed. This rise in price for Sanmina can be attributed to a mixture of the

firms deleveraging tactics and its massive increase in revenues from $6.22 billion in 2014 to $6.67

billion in 2015. This puts the company right on par with the industry average, which previously was not

met. The struggle for Sanmina will be to maintain this growth momentum in the next five years since

analysts also suggest that the company will see a -0.72% growth for PEG in the next five years. Also seen

in the analysts figures below, Sanmina has a trailing price to earnings ratio 0f 10.56, and a forward price

to earnings ratio of 10.06. The forward price to earnings ratio is noted in the graph below to represent d

ata calculated in reference to September 27, 2016.

Valuation Measures via Yahoo Finance

Market Cap (intraday)5: 2.07B

Enterprise Value (Apr 10, 2015)3: 2.15B

Trailing P/E (ttm, intraday): 10.97

Forward P/E (fye Sep 27, 2016)1: 10.06

PEG Ratio (5 yr expected)1: -0.72

Price/Sales (ttm): 0.32

Price/Book (mrq): 1.60

Enterprise Value/Revenue (ttm)3: 0.33

Enterprise Value/EBITDA (ttm)6: 6.51

In terms of industry, Industrial/Medical/Defense revenues are expected to continue to drive

growth, and expansion will continue throughout early 2015. While revenue growth was strong through

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the first quarter of 2015 analysts predict this growth will slow as seasonality and other factors hinder the

firms revenue, with the biggest challenge being maintenance of positive growth in the next five years.

Although some industry divisions of Sanmina are predicted by analysts to underperform in the

next few years, we believe investors will continue to see positive growth on the stock. In terms of

portfolio management, patience with this security will show to pay off in the next year, with riskier

performance being expected for the five year outlook. Below, is an example of this response for expected

performance, with the majority of analysts currently recommending to either a buy or hold this security.

We recommend similar actions since our calculations from the above data expects Sanmina to grow

15.6% through 2015; this is below the expected growth of the industry at 22.7%, but with continued

change to capital structure by deleveraging efforts, firm value should continue to increase further into

2016, which we also expect to reflect positively in the market and thus increase price per share as a result.

Notable changes we saw that added value for the firm were that cash reserves, in the past, were

primarily focused on principal and interest payments of said debt, however now, many investors will

expect reserves to be used more responsibly since deleveraging has freed up these funds. Reserves can be

focused on the issuance of a dividend which has never happened before in the companys past. The

company dividend payment would further build value to shareholders and show Sanminas maturity level

as a firm. Lastly, our evaluation has shown that Sanminas innovative technology and government

contracts are invaluable and even hidden assets to the company; contracts give Sanmina an expected cash

flow from completion of steady projects since the average time period of these projects locks in work for

the company at five years on average. Also, this clandestine type of project focus further protects trade

secrets and new developments that would normally be visible by competing firms.

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Citations

Sanmina Corp: Company Profile. Bloomberg.com. April 2, 2015. Accessed April 04, 2015.

http://www.bloomberg.com/profiles/companies/SANM:US-sanmina-corp.

Sanmina Corporation Company Profile and Background Information. Sanmina Corporation.

January 2014. Accessed April 04, 2015.

http://www.sanmina.com/company-profile/index.php.

SANM Profile and Sanmina Corporation Stock - Yahoo Finance. Yahoo Finance. April 4,

2015. Accessed April 04, 2015. http://finance.yahoo.com/q/pr?s=SANM.

Sanmina Corporation (SANM). NASDAQ.com. April 2, 2015. Accessed April 04, 2015.

http://www.nasdaq.com/symbol/sanm.

Sanmina: Sitting in the Sweet Spot of Contract Manufacturing. Seeking Alpha. March 25, 2015.

Accessed April 05, 2015. http://seekingalpha.com/article/3027156-sanmina-sitting-in-

the-sweet-spot-of-contract-manufacturing.

Sanmina Corporation JavaScript Charts and Maps. AmCharts. April 02, 2014. Accessed April

07, 2015. http://www.amcharts.com/.