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Technology Stocks : Sanmina Corp. (SANM) -- Ignore unavailable to you. Want to Upgrade?

To: mopgcw who wrote (221)	7/21/2004 11:26:13 PM
From: mopgcw	Respond to of 239

GS: SANM: good results vs low expectations & credible path to 05E; + for stock 52-Week Range US$15-7 YTD Price Change -45.48% Market Cap US$3.6bn Current Yield — EPS Growth Estimate 15% We liked low expectations into the qtr & SANM delivered better than we expected; we'd buy shares below $8 & see fair value in low $8s. We up F4QE 1c to 9c & up FY05E 4c to 50c (new CY05E is 55c); we see 25+% upside from $7.50 level; maint favorable IL/N. RESULTS:Jun-Q was solid ($3.1B/7c v GS/FC $3.0B/6c) with inline margins & other details (though c/f from ops was -$103m); more importantly, they held good Sep-Q guidance with credible path for Sep-Q & FY05E (incl new $100m restructuring plan to save $20m/qtr). KEY PTS: (1) New restructuring is + for FY05 saving >$20m/qtr when done. (2) Volume, mix, pricing, cost cuts & ODM progress drive N/T margin expansion; we now expect 3% optg mrgn Dec-Q. (3) PCBs were light, but they're comfortable minor inventory correction is over. (4) Good PCB strategy to focus high-cost regions on NPI, design, & low vol work, with Asia for core production. (5) Positive results in telecom infrastructure & high vol computing; favorable outlook for telecom & enterprise h/w; flat inventory. RECOMMENDATION: AT $7.50, WE SEE 25+% UPSIDE POTENTIAL We use some traditional valuation metrics and a proprietary ROIC-based valuation. At $7.50, P/E of 13.6x on our CY05 55c earnings is below 16.1x peer avg; price-to-tangible book of 3.7x is above 2.7x peer avg; price-to- LTM revs of 0.34x is below 0.53x peer avg. We see 25% upside medium-term as 16x-18x P/E yields $9-$10 stock price. We also use a proprietary valuation methodology based on a 10- year analysis of EV and adjusted-ROIC for a basket of OEM customers of EMS companies. On this basis, our implied model price also suggests 25+% medium-term upside. IMPLICATIONS: SLIGHT + FOR EMS, TELECOM, & ENTERPRISE (1) EMS GROUP: SANM results/guidance is a slight positive for other top EMS companies as we think solid results (particularly telecom infrastructure) and good guidance, offset mixed news from FLEX Monday & JBL last month. Positive commentary on EMS pricing and confidence of market conditions should carry a bit more credibility than similar comments from FLEX mgmt who's credibility is temporarily diminished. For the second qtr in a row, SANM's book to bill ratio was above 1.1. (2) MACRO COMMENTS from SANM describe the following: slow and steady enterprise h/w improvement, stable wireline telecom, and strong wireless telecom infrastructure. Flat inventory q-q is another good macro datapoint; only shortages in memory and discrete components. Finally, mgmt described a distinct excess production in the PCB market in Mar-Q, primarily in telecom, which caused PCB weakness in Jun-Q (down 10% q-q); they very much believe inventory has been worked off and Sep-Q should reflect natural mkt growth again. (3) TELECOM: Carrier-based telecom equip, particularly wireless, was +9% q- q in Jun-Q and they expect +2.5% to +5% for Sep-Q. Top wireless infrastructure customers include (NT, ALA, ERICY, and NOK, in that order, each, roughly 3%-6% of total revs). (4) ENTERPRISE H/W: High volume computing (i.e. commercial PCs and Intel- based servers like the IBM xSeries) were +6% in Jun-Q and expected to be flat to +5% in Sep-Q; good, but not great results (IBM ~22% of revs; HPQ ~ 10% of revs). High end enterprise h/w (servers & storage) were merely flat vs +5% expectation, reflecting weakness they saw in storage (key storage customers are STK and EMC); Sep-Q outlook is more encouraging, with +10% to +15% q-q expectation (key customers in addition to storage include IBM, HPQ, and DELL). 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 early Aug) commercial PCs; Dell (about 5% of revs, reports early Aug); Ericsson (about 3% of revs); NT (about 5%) and SUNW AMD-server progress as it is SANM's ODM server (<1% of revs, but growing). (2) Financial goals remain unchanged (15% FY04 growth, 3-4% op margin by Dec-04, 6-8% op margin L/T). Particularly in light of the additional restructuring program, N/T financial goals seem credible and achievable. Our new model has Dec-04 optg margin of 3.0% and FY05 optg mrgn of 3.4% (3.6% for CY05). (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 4-5 qtrs. Mgmt expects $22m-$24m in qtrly savings once the entire restructuring is complete. We believe this initiative includes both EMS and PCB operations and think shift from high- cost to low-cost regions is likely to backend cost benefits. We think our model is somewhat conservative on cost reduction benefits, leaving a few pennies upside potential to our CY05E. (4) ODM server program had $30m revs in Jun-Q and they expect roughly $75m in Sep-Q, above their $50m/qtr goal established earlier this year. They continue to invest about $4m/q in ODM R&D and seem comfortable with progress because of their two deals with major OEM's (likely SUNW & IBM so we'd watch progress from these OEMs w/ their AMD Opteron servers). (5) PCBs are driven by telecom/datacom & high end enterprise h/w. Revenue was down 10% q-q to about $100m in Jun-Q with profits in the low single digits; capacity utilization was flat q-q at about 57%. Mgmt described what we have heard from many others in PCB's; a bit of overproduction in Mar-Q led to slightly elevated inventories at customers who scaled back orders in Jun-Q. Mgmt seems optimistic for Sep-Q and expects PCB's to be more representative of true end demand. SUMMARY OF F3Q04 (JUN) RESULTS VS OUR ESTS VS MAR-Q GS est. As Reported MAR-Q -------------------------------------------------------- Revenue $3.01B $3.07B $2.86B Gross Margin 5.3% 5.2% 5.1% Op margin 2.3% 2.2% 2.0% Adj Net Income $33.1m $34.4m $26.6m Cash EPS $0.06 $0.07 $0.05 Inventory turns 10.4x 9.3x DSOs 47 52 Cash Cycle 31 33 -------------------------------------------------------- Source: Goldman Sachs research estimates and Company reports. SEGMENT BREAKDOWN JUN-Q Q-Q SEP-Q % of rev $ chg outlook ---------------------------------------------------------------- Communications 26% +9% +2.5 - 5% Personal/Business Comp 37% +5% flat to +5% Enterprise h/w & storage 14% -2% +10 - 15% Industrial/Med/Instr 12% +10% +5 - 10% Multimedia 11% +20% flat to -5% ---------------------------------------------------------------- Source: Company reports. I, Stephen Savas, hereby certify that all of the views expressed