Sanmina: Will the Momentum Last?

Chances are you haven’t heard of Sanmina (SANM), but in the past year, this small-cap stock has seen its shares nearly double.

So, who the heck are these guys? And can this run last much longer?

Well, to start, some background: Sanmina provides end-to-end manufacturing and logistics for sophisticated optical, electronic and mechanical products. Its customers span industries like network communications, storage, healthcare, defense, aerospace and even cleantech.

Despite what its seemingly low visibility might indicate, Sanmina actually is a Silicon Valley veteran founded back in 1980; co-founder Jure Sola still remains as CEO and chairman.

Fast-forward 33 years, and Sanmina has found itself on quite a roll, for several reasons.

For one, the company has been selling off assets, such as real estate. It also has reduced its debt load by about $500 million, which took down interest expenses by roughly 40% to $23.5 million. The result has been a bump-up in earnings.

Going forward, Sanmina is likely to get a lift from growing demand, especially from mobile products. It also helps that the company has fairly low levels of inventory.

Of course, Sanmina is not without some nagging issues.

Pressure from rivals — including Benchmark Electronics (BHE), Celestica (CLS), Flextronics (FLEX), Jabil Circuit (JBL) and Plexus (PLXS) — is a big reason why Sanmina’s revenue base has been stuck in a range of $6.1 billion to $6.6 billion during the past three years.

At the same time, the company must deal with substantial customer concentration — with a mere 10 accounting for nearly half of its overall sales. Ergo, losing just one customer would be devastating.

The long-term might also be challenging. Sanmina spends a mere 0.4% of revenues on R&D — that’ll certainly help boost earnings, but it can’t mean good things for innovation of the product line.

Still, if you’re just looking for a shorter-term trade, this might not matter much. On a valuation basis, shares are cheap at just six times earnings, dwarfed by most of its competitors, which sport multiples from 10 to 12.

So, even some improvement in demand — which seems likely — could mean more upside for Sanmina. But it’s probably not a stock you’ll want to hold onto for the long haul.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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