SANM: Fiscal 2Q In-Line--Telecom Outsourcing Looks Imminent
Salomon Smith Barney
Tuesday, April 20, 1999
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Telecom outsourcing represents the next leg of growth for the EMS
industry, in our view, and we think investors will focus on this enormous
opportunity, which Sanmina should be able to capitalize on given its
traditional focus on telecom and datacom customers. On the conference
call last night, management suggested that several deals may be announced
within the next 90 days. We caution that any number of hitches could
delay the deal-making process, but the telecom opportunity that investors
have been anticipating appears to be approaching. Management estimated
potential revenue dollars available from telecom OEMs over the next two
years to be in the $10 billion range. Other have used estimates of
$50-$60 billion as the total opportunity over the long term. For
Sanmina, if we look at acquisitions of OEM assets and other telco deals
ranging from $250 million to a billion dollars over the next two years,
we calculate anywhere from $0.05 to $0.60 accretion on the bottom line,
depending on the margins of the programs. We believe that over time,
programs that start at low margins should be able to not only expand
their margins due to efficiencies, but also develop into full-systems
relationships with key telecom equipment OEMs. We view telecom as the
most promising area in technology today.
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People need to understand (and they currently don't) that Sanmina is a very different
business than JBL/FLEX etc.
SANM is primarily a backplane player, and that industry is predominently outsourced,
so they now rely primarily on customers organic growth (and backplanes go into a lot
of high growth stuff) as opposed to the general trend to outsourcing and winning giant
new programs. As indicitive of the difference, when is the last timme anyone heard
about a SANM giant new customer win? Also, look at SANM margin %, much higher
than anyone else as they are getting paid for higher value-added backplane fabrication.
BTW, the backplane market is much smaller (maybe 1/1000) than the overall market
available to contract mfgs. like JBL and FLEX.
So it may be that the limits of the market size that SANM plays in is finally catching
up to them (two dicey Q's out of last 4). SANM is a great company, but in my opinion
will not be able to sustain 30%+ growth like the other guys for the next 5 years. FOr
this reason (and valuation), have always owned JBL/FLEX as opposed to SANM.
JMHO.
MArc |
