SANM: Is Sanmina Stock a Buy?

Manufacturing services provider Sanmina Corporation (SANM) has demonstrated impressive resilience over the past year despite the slump in the broader manufacturing sector. The stock has gained 28.9% over the past nine months. While the company’s operations were severely affected by the coronavirus-driven economic slump, the company retained investor confidence by making key changes in its corporate governance policies.

On January 6, SANM announced the re-appointment of Hari Pillai as president of Components Technology. With more than 25 years’ experience, Pillai’s re-appointment to SANM’s leadership structure should help the company to emerge as a leading supplier to OEMs and other companies.

However, with the slow revival of the U.S. manufacturing sector raising concerns, SANM has gained just 9.7% over the past three months.

Here’s what we think could drive SANM’s performance in the upcoming months:

Favorable Government Policies Amid Global Macroeconomic Recovery

After witnessing a pullback between March and May 2020, the U.S. manufacturing sector has been growing over the past eight months. The Institute for Supply Management’s Manufacturing Index stood at 58.70 in January. This indicated that manufacturing activity is increasing. Also, the IHS Markit Manufacturing Survey index rose 210 basis points to 59.2. With a dovish Federal Reserve monetary policy and a gradual resumption of industrial and economic activities, the country’s manufacturing prospects look bright, which bodes well for SANM.

Relative Undervaluation

SANM’s non-GAAP forward p/e of 9.76x is 65.3% lower than the industry average 28.10x. In terms of non-GAAP forward PEG, SANM is currently trading at 0.76x, 63.4% lower than the category average 2.08x.

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The company’s forward price/sales and price/cash flow ratios of 0.33 and 7.65 compare favorably with respective industry averages.

Consensus Ratings and Price Target Indicate Potential Upside

SANM has gained 94.2% to hit its 52-week high of $35.61 on January 13, 2021, since hitting its 52-week low of $18.34 in March. Analysts expect the stock to hit a fresh high of $39.67 soon, indicating a potential upside of 13.1%.

SANM has an average broker rating of 1.62, indicating favorable analyst sentiment. Of four Wall Street analysts that rated the stock, one rated it Strong Buy and one rated it Buy.

Favorable POWR Ratings

SANM has an overall rating of A, which equates to Strong Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Our proprietary rating system evaluates each stock on a total eight different categories. SANM has a B grade for Growth, Value and Quality. This is justified, given the stock’s impressive financials and discounted valuation.

SANM’s trailing 12-month ROE, ROA and return on total capital of 8.9%, 3.95% and 8.08%, respectively, compare favorably with the respective industry averages. Moreover, the company’s asset turnover ratio of 1.81 is 177.5% higher than the industry average 0.65%.

In the 81-stock Technology – Services industry, SANM is ranked #2. In addition to the grades I’ve highlighted, check out POWR Ratings for Momentum, Stability and Sentiment here.

Click here to check out other top-rated stocks in the Technology – Services industry.

Bottom Line

We think SANM is well-positioned to make a strong comeback in tandem with the economy. Moreover, with President Biden’s desire to make the United States the leading contender in the global economy as well as protect America’s middle class, home-based companies are expected to be favored. Moreover, with Biden’s plans to crack down on China, which is the biggest rival of the U.S.’ manufacturing sector, SANM should witness a surge in demand in the near future.

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SANM shares were trading at $35.01 per share on Friday afternoon, up $0.14 (+0.40%). Year-to-date, SANM has gained 9.78%, versus a 4.29% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...