Sanmina: Masked Margin Weakness Likely To Unravel

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Sanmina corp office successful Silicon Valley

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Sanmina (NASDAQ:SANM) has seen accordant growth, nevertheless I judge location is separator degradation that is presently masked. I person a neutral outlook connected nan banal owed to 2 cardinal reasons:

  1. Sanmina has had beardown maturation but margins weakness is masked
  2. A higher than expected PPI people is apt to measurement connected nan stock

Sanmina has had beardown growth, but margins weakness is masked

Sales maturation QoQ

Sales maturation QoQ (Company Filings, Author's Analysis)

The past 5 quarters for SANM person been singular pinch very accordant QoQ maturation of much than 7.5% connected average. The value of this maturation is robust and broad-based arsenic well:

IMS gross maturation QoQ

IMS gross maturation QoQ (Company Filings, Author's Analysis)

The integrated manufacturing solutions (IMS) segment, which makes up 80.7% of revenues has been nan comparative maturation leader pinch 8.0% QoQ maturation connected average for nan past 5 quarters.

CPS gross maturation QoQ

CPS gross maturation QoQ (Company Filings, Author's Analysis)

The components, products and services (CPS) conception makes up 19.3% of revenues. It has besides grown resiliently, albeit astatine a smaller clip complete nan past 5-6 quarters. Despite nan smaller top-line growth, it has had a greater publication to gross profit owed to a higher gross separator profile; 13.3% for CPS vs 6.9% for IMS). CPS' gross profit operation has accrued from 28.6% to 31.7% complete nan past 5 quarters. The pursuing conception describes nan reasons:

Gross profit margin

Gross profit separator (Company Filings, Author's Analysis)

Overall, this has led to an optically alternatively unchangeable gross profit separator profile.

However, nan past quarterly people has been boosted by a 140bps gross separator boost successful nan CPS segment:

CPS gross profit margin

CPS gross profit separator (Company Filings, Author's Analysis)

Management attributes nan past quarterly jump successful gross margins to a "better merchandise mix".

This has made up for a dependable autumn successful IMS owed to input costs headwinds:

IMS gross profit margin

IMS gross profit separator (Company Filings, Author's Analysis)

The equilibrium of a 90bps gross separator betterment is owed to unallocated items, which stay astatine changeless rates.

Key Message

IMS is nan awesome maturation driver of nan stock, but is facing immoderate mini declines successful separator headwinds. CPS is increasing beneath nan institution average, but has benefited from a merchandise operation that has led to amended pricing.

I americium skeptical astir nan sustainability of nan gross separator use boost successful CPS arsenic history shows that merchandise operation shifts are not reliable structural changes. For example, successful Q4 FY22, guidance cited a worse merchandise mix arsenic being nan awesome logic for little gross margins.

Therefore, if we presume that nan 140bps gross separator boost successful CPS to beryllium temporary, past according to my calculations, Q1 FY23 information would already show a crisp gross separator diminution of 30bps from 8.1% to 7.8%. This whitethorn not look for illustration much, but for nan physics manufacturing industry, which operates connected bladed margins astatine precocious volumes, it has a ample impact. And I fearfulness this is apt to get worse:

A higher than expected PPI people is apt to measurement connected nan stock


PPI MoM (MyFXBook, Author's Analysis)

On 16th February 2023, nan Producer Price Inflation (PPI) people came successful astatine 0.70%, which is 30bps higher than nan statement expectations of 0.40%. Over nan past 10 years of PPI data, nan mean astonishment has been +1.10bps. So a astonishment of +30bps is rather meaningful and highly applicable for SANM's physics manufacturing services business.

I judge this is apt to origin higher than expected separator pressures connected SANM, not conscionable for nan existent quarter, but apt for early quarters arsenic well. This is because arsenic discussed earlier, I judge nan merchandise operation use is not structural.

Moreover, based connected my calculations utilizing 118 months of data, nan chances of a higher existent PPI people successful nan period succeeding a affirmative astonishment is 14.0%. The chances of different affirmative astonishment successful nan period succeeding a affirmative astonishment people is overmuch higher astatine 36.8%. As markets value securities based connected expectations, I judge this suggests a meaningful upside consequence to PPI and broader ostentation numbers and hence SANM's gross margins.

You tin cheque my calculations connected these PPI statistic here.

Technical Analysis

If this is your first clip reference a Hunting Alpha article utilizing Technical Analysis, you whitethorn want to publication this post, which explains really and why I publication nan charts nan measurement I do, utilizing principles of Flow, Location and Trap.

Relative Read of SANM vs SPX500

SANM vs SPX500 Technical Analysis

SANM vs SPX500 Technical Analysis (TradingView, Author's Analysis)

On nan comparative ratio floor plan of SANM vs nan S&P500 (SPY) (SPX), sellers person sharply reacted astatine nan monthly guidance marked by a anterior section high. I judge nan prices are owed to regain buyside liquidity astatine nan monthly support area, pursuing immoderate consolidation.

Standalone Read of SANM

SANM Technical Analysis

SANM Technical Analysis (TradingView, Author's Analysis)

On nan standalone floor plan of SANM, we spot a sudden, crisp move up later successful nan trend. The velocity of nan move up present is overmuch faster than nan moves up arsenic nan bottommost was forming and nan inclination was turning upwards. Notably, nan crisp move up was not preceded by a mendacious breakout to nan downside. Based connected my research connected bubbles and euphoria crossed world financial markets, this is simply a motion of euphoria. Hence, I americium skeptical of further upside, isolated from possibly to re-touch nan monthly guidance astatine $70.51. I expect a reset backmost down to $42.98 complete nan upcoming months and quarters.


SANM's gross margins successful nan past 4th appeared optically steady, pinch a 140bps boost successful CPS gross margins masking a gradual diminution successful IMS gross margins owed to rising input costs. With higher than expected PPI prints that person 36.8% chance of continuing to astonishment connected nan upside successful February, I judge SANM is apt to spot separator declines successful nan adjacent quarter.

Despite this headwind, maturation remains beardown and nan technicals besides propose a neutral outlook for now. Hence, I complaint SANM a 'hold'.

This article was written by

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