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Sanmina Takes It "One Day at a Time" Until Further Notice

By Anders Bylund - Jan 29, 2020 at 8:03AM

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The electronics manufacturer has limited business visibility in this turbulent economic environment.

Sanmina (SANM -3.79%) reported first-quarter results for fiscal year 2020 this Monday evening. The electronics manufacturer and printed circuit board maker crushed Wall Street's estimates, sending Sanmina's stock as much as 7% higher in Tuesday's trading.

Sanmina's first-quarter results by the numbers

Metric

Q1 2020

Q1 2019

Change

Analyst Consensus

Revenue

$1.84 billion

$2.19 billion

(16%)

$1.77 billion

GAAP net income

$38.4 million

$38.0 million

1%

N/A

Adjusted earnings per share (diluted)

$0.79

$0.83

(4.8%)

$0.69

Data source: Sanmina. GAAP = generally accepted accounting principles.

Taking care of a long-standing inventory problem

Three months ago, Sanmina set first-quarter guidance targets well below the consensus analyst views of the time. The reported results exceeded the top end of those disappointing guidance ranges but still fell below the Street targets from last October. As a reminder, your average analyst was looking for earnings near $0.87 per share on revenues near $2.18 billion before Sanmina's guidance came in.

The modest business targets were caused by bulging inventories in Sanmina's warehouses and shipping channels -- a condition that has been weighing on Sanmina since the fall of 2018. The company's internal inventories were reduced by 6% in the first quarter, relieving some of the channel pressure and allowing Sanmina to collect slightly higher top-line revenues than expected. Inventories fell by 20% on a year-over-year basis.

Close-up shot of a fully populated circuit board in red and purple lighting.

Image source: Getty Images.

Looking ahead

Management's next-quarter guidance was more in line with current analyst views this time. Sanmina expects adjusted second-quarter earnings of roughly $0.70 per share on revenues in the neighborhood of $1.75 billion. The current Street consensus points to earnings of $0.70 per share and top-line sales near $1.79 billion.

Management declined to give any guidance past the next quarter, citing foggy visibility across its target markets.

"We are really taking this like one day, one week at a time here," CEO Hartmut Lievel said on the first-quarter earnings call.

That being said, the battle against excess inventories will continue. Liebel mused that revenue growth should return alongside widening margins once the inventory hangover has been cleared out of the shipping pipeline. There's just no telling how long that will take, since the underlying cause of the inventory mess was an ongoing shortage of commodities such as capacitors and resistors.

An investor's takeaway

Investors and analysts alike are embracing Sanmina's inventory reduction efforts, looking forward to better results when customers from the medical and automotive sectors come back, hats in hand, with more and larger orders. The commodity shortage issues appear to have subsided, which should clear a path toward stronger financial results. Just don't expect management to say so quite yet.

Sanmina's stock has posted a 28% bounce from the 52-week lows it recorded last summer, not to mention a 45% recovery from the depths of 2018. But the stock is still trading at a bargain-bin valuation of 10 times forward earnings or 9 times free cash flows, so there's plenty of room for further gains. It's not too late to invest in Sanmina's ongoing rehabilitation process.

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