GS: SANM: good results relative to peers &
enclosure issue seems S/T; reit OP/N
52-Week Range US$15-6
YTD Price Change -40.24%
Market Cap US$3.9bn
EPS Growth Estimate 15%
Rev strength we thought possible, materialized, but enclosure unit hiccup took away 1c
this qtr & next; still pretty good relative to much of tech & EMS. We think light #s was in
stock, so neutral impact & attractive if pressured; reit OP/N with 25+% upside L/T.
Strong revs $3.3B vs GS/FC $3.2B was driven mostly by good product exposures as we
hoped, in commercial PC & servers. Optg & B/S metrics and c/f were very good. We
tweak Dec-Q down 1c to 10c (vs 9c-11c guidance) & our CY05E down 2c to 53c. KEY
POINTS: (1) Enclosure issue isn't great to see but s/b short-lived & corrected by end of
Dec-Q; this eliminates 1c hit to EPS (~20bp margin drag). (2) Commtech strength, +14%
q-q, reflects good customer & product mix; FLEX delay w/ NT should push potential rev
loss for SANM back into CY06. (3) With revs outperforming peers, the sore spot is gross
& optg margins: add 20bp from enclosure hiccup, 10-15bp from mix impact (high PC
volume), & 10-15bp from restructuring N/T, & optg mrgn is ~3%, before other benefits
kick in.
RECOMMENDATION: AT $7.50, WE SEE 25+% UPSIDE L/T
SANM is still our favorite EMS name medium term, on good product mix for 4Q seasonality and
modest valuation. We use some traditional valuation metrics and a proprietary ROIC-based
valuation. At $7.50, P/E of 14x our CY05 53c earnings is below 16x peer avg; price-to-tangible
book of 3.6x is above 2.6x peer avg; price-to-LTM revs of 0.32x is below 0.53x peer avg. We see
20+% upside (just 16x-18x P/E yields $9+ stock price). Furthermore, our proprietary ROIC-based
valuation methodology suggests 35+% long-term upside; we view this valuation model as most
important in our view of shares as it has proven fairly reliable.
IMPLICATIONS: SLIGHT + FOR EMS, TELECOM, & ENTERPRISE
(1) EMS GROUP: SANM is a bit of an outlier with stronger topline for Sep-Q and outlook for
Dec-Q. SANM strength is partly driven by it's uniquely high exposure to commercial PCs and
industry standard servers (a key reason it is our top pick at this time). Comments on stable
environment with rational pricing was not unexpected. For JBL and SLR, however, SANM results
could be a slight positive as JBL & SLR reported in Sept, before they may have seen strength that
came through in the months of Sept and Oct. For CLS, we remain thoroughly confused and a bit
concerned about their statements that end markets are unusually volatile and low visibility; with
SANM market comments in line with FLEX, PLXS, BHE, and most top OEMs, CLS remains an
outlier with above avg uncertainty.
(2) TELECOM was +14% q- q in Sep-Q vs. mgmt expectations of +2.5% to +5%; they expect
telecom +5% for Dec-Q. Wireless infrastructure drove strength in all regions; top customers
include (NT, ALA, ERICY, and NOK, in that order, each, roughly 3%-6% of total revs). Optical
equipment (primarily LU) and datacom were also up slightly more than the entire segment growth.
(3) ENTERPRISE H/W: High-volume computing was +10% in Sep-Q vs. mgmt expectations of up
flat to +5%; they expect +2% to 7%% in Dec-Q; Top customers: IBM ~22% of revs (half
commercial PC half X-series)& HPQ ~ 10% of revs. High-end enterprise h/w (servers & storage)
was a bit weaker than expected, +4% q-q vs +10% expectation, partly on weakness in storage (key
storage customers are STK and EMC). Dec-Q outlook is for flat to +5% (key customers in addition
to storage include IBM, HPQ, and DELL). We should note that their ODM server in this business
(primarily Opteron servers for Sun, were nearly $50m revs in the qtr and expect moderate growth
for Dec- Q.)
WHAT TO WATCH FOR: KEY CUSTOMERS, FINANCIAL GOALS, & RESTRUCTURING
(1) Key OEM news: IBM (about 22% of revs, already rptd) X-Series Intel servers and commercial
desktop PCs; HPQ (about 10% of revs, reports 11/15) commercial PCs; Dell (about 5% of revs,
reports 11/11); Ericsson (about 3% of revs); NT (about 5%) and SUNW AMD-server progress as it
is SANM's ODM server (<2%of revs, but growing).
(2) Financial goals remain roughly the same: revs up >10% in FY05, 4% optg margin by FYE, with
6% L/T optg margin goal.
(3) Previous restructuring initiatives from late 02 are now essentially complete. Attention then turns
to the new $100m restructuring charge expected to be taken over the next 2-3 qtrs; some has
already been effected. Mgmt expects $22m-$24m in qtrly savings once the entire restructuring is
complete. We think our model is somewhat conservative on cost reduction benefits, leaving a few
pennies upside potential to our CY05E.
(4) We est the ODM server program contributed ~$48m in revs for Sep-Q roughly at their Dec-Q
goal of $50m/qtr. They continue to invest about $4m/q in ODM R&D and have just turned
profitable in this business. We watch sales of AMD Opteron servers for IBM & SUNW (likely
customers of SANM's ODM server program).
SUMMARY OF F4Q04 (SEP) RESULTS VS OUR ESTS VS JUN-Q
GS est. As Reported Jun-Q
--------------------------------------------------------
Revenue $3.19B $3.30B $3.07B
Gross Margin 5.7% 5.3% 5.2%
Op margin 2.9% 2.4% 2.2%
Adj Net Income $49.3m $41.8m $34.4m
Cash EPS $0.09 $0.08 $0.07
Inventory turns 11.5x 10.4x
DSOs 45 47
Cash Cycle 29 31
--------------------------------------------------------
Source: Goldman Sachs research estimates and Company reports.
SEGMENT BREAKDOWN
Sep-Q Q-Q Dec-Q
% of rev $ chg outlook
----------------------------------------------------------------
Communications 27% +15% "+5% range"
Personal/Business Comp 38% +10% up 2 - 7%
Enterprise h/w & storage 14% +4% flat to +5%
Industrial/Med/Instr 12% +3% up 2 - 5%
Multimedia 9% -12% down 10 - 20%
----------------------------------------------------------------
Source: Company reports.
NEW AND OLD ESTIMATES
REVENUE EPS
OLD NEW OLD NEW
-----------------------------------------------
Dec-04E $3.48B $3.43B $0.11 $0.10
Mar-05E $3.27B $3.23B $0.11 $0.10
Jun-05E $3.42B $3.37B $0.13 $0.12
Sep-05E $3.56B $3.51B $0.14 $0.14
Dec-05E $3.82B $3.77B $0.17 $0.16
CY04E $12.61B $12.67B $0.32 $0.30
CY05E $14.07B $13.88B $0.55 $0.53
-----------------------------------------------
Source: Goldman Sachs research estimates.
I, Stephen Savas, hereby certify that all of the views expressed in this report accurately reflect my
personal views about the subject company or companie |
