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Three year forecast: EMS without Sanmina-SCI
Sanmina-SCI, a long-struggling EMS provider, has been trading at a fraction of book value (asset value on balance sheet) for some time.
Some might say things are beginning to improve.
The main question, at least on the minds of investors, is whether or not the Company can turn itself around.
The question on the mind of OEM executives is whether or not the Company can execute and meet commitments.
What's wrong?
- Sanmina-SCI has a flawed vertical integration strategy. The Company's focus is on high-mix / low-volume products (as opposed to Flextronics and Hon Hai, which both focus their vertical strategies primarily on high-volume, low-mix consumer products) Some in industry say a vertical integration strategy at Sanmina-SCI can work, given that Sanmina is not quite high-mix / low-volume and more like medium-mix / medium-volume.
- The person holding the CEO title is also the chairman of the Board (read: you're unlikely to find critical discussion or opposing viewpoints in the Board room).
- Length of leadership: In 1980, Jure Sola co-founded Sanmina-SCI and initially held the position of vice president of sales. In October 1987, he became vice president and general manager of Sanmina Corporation, responsible for manufacturing operations and sales and marketing. In July 1989, he was elected as a director and in October 1989 was appointed as president of Sanmina Corporation. He's served as CEO since April 1991, as chairman of the board of directors from April 1991 to December 2001 and, from December 2002 to present. He was co-chairman of Sanmina-SCI's board from December 2001 to December 2002. All said, Jure Sola has been at the helm a long time. New blood would likely be a good thing, not just for opposing viewpoints but also for more robust decision-making and execution focus.
- Most members of the board have been a board member for a considerable amount of time.
- Management recently announced the board approved a potential reverse stock split in the range of 1-for-3 to 1-for-10...to be voted on at a shareholder meeting in September. While a reverse stock split would be a positive for the shares in helping manage the perception of what has begun looking like a one-dollar stock. If you put lipstick on a pig, you still have a pig. If the current Company executive team truly believes in its ability to turnaround the Company, why are they not buying back stock or some other form of common delivery of share holder value?
One other thing of noteworthy interest, CEO pay and Company stock performance is out of sync:
| Company |
CEO | Salary | 5-Year change in stock price |
| Flextronics | Mike McNamara | $1 Million | -18% |
| Jabil Circuit | Tim Main | $1 Million | -30% |
| Celestica | Craig Muhlhouser | $.75 Million | -45% |
| Benchmark | Cary Fu | $.62 Million | -63% |
| Sanmina-SCI | Jure Sola | $.79 Million | -80% |
Source: Morningstar, company reports. 5-year change in stock price as of July 3, 2008.
To boot, analyst firm iSuppli recently disclosed reasons, compiled through industry interviews (* see comments), a company like Sanmina-SCI might not be around by 2013. To be fair, the firm also has EMS provider Celestica in its sights.
The list below reads more like excuses than reasons with each pointing to one conclusion. Poor management.
Whether it's poor management of factories and customers and supply chains or poor management of people and finances. The list reads as: (Source: iSuppli)
- Excess industry capacity
- Cheap company valuations
- Large customer disengagements
- Operational / supply chain issues
- Regional challenges
- Tough competitive landscape
- Challenged financials
- Senior management churn
- Lack of differentiation
- Poor strategic choices
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VentureOutsource.com
VentureOutsource.com received the following email regarding the article above. It was published to provide readers an alternative viewpoint.
Its important to note VentureOutsource.com has reached out to Sanmina-SCI on more than one occasion for responses and even an industry interview.
With regards to an interview, on each occasion, the Company agreed to do so only if it was able to exclude certain topics and / or select / formulate questions to be included in discussion. VentureOutsource.com, each time, decided not to proceed with the conditions proposed because such constraints could result in an interview being interpreted as promotional material.
VentureOutsource.com welcomes opposing views and encourages individuals and companies in industry to engage one another through constructive dialogue and commentary.
BEGIN --
I wanted to touch base with you regarding the stories you recently did on Sanmina-SCI, one of which was based on a report from JP Morgan (running on VentureOutsource.com on August 13 and August 14).
As you might imagine, Sanmina-SCI wasn't happy with your portrayal of the company, particularly given the errors in fact and gross overstatements. For example, you gloss over Sanmina-SCI's position in non-traditional EMS markets by stating that the company has "reasonably good capabilities" in these markets when in fact Sanmina-SCI is the number one EMS provider in the medical industry - representing every single top tier OEM in this space - and is also a top EMS provider in industrial/semiconductor and defense and aerospace. Sanmina-SCI's strength in these core markets is one of its key differentiators against the competition.
More importantly, the idea that a vertical strategy that focuses on high-mix/low-volume production is flawed is an unfair, and unsubstantiated argument. It is true that Sanmina-SCI differentiates itself from behemoth EMS companies like Flextronics and Foxconn that have continued to focus on low-mix, low margin consumer products such as cell phones, but Sanmina-SCI's highly skilled team of engineers, designers and manufacturing capabilities is better suited for complex manufacturing that provides much higher profit margins. This vertical strategy is key to the continued growth and success of the company. Trying to duke it out with other EMS companies for the same cell phone and PDA business is a fruitless effort, and if you were familiar with Sanmina-SCI, you would know that the company distances itself from this type of manufacturing for a very specific reason.
It is a shame that you used one flawed source for the first article (the iSuppli report that erroneously quoted an EMS company that never spoke to them) and in your second article, only referenced the JP Morgan report of which you cherry picked the parts that you wanted to include. If you had attempted to do any research or conduct a discussion with Sanmina-SCI, you would have learned that the components business (for example) is under strict review and the company has indeed been working tirelessly toward making this division more profitable and more efficient. JP Morgan recognized these efforts in their own report as well.
And while it may be true that every company has customers who are not entirely satisfied, Sanmina-SCI stands firmly by its solid customer service record and has seen not only an increase in business from its current customers, but the company has also won some strategic contracts from companies shifting their production from rival EMS players.
In short, we were disappointed to read your article and discover that it was little more than a regurgitation of another analyst firm's report, of which many key components and facts were either missing or misrepresented. At no time did you make any effort to contact Sanmina-SCI for comment or questions. While Sanmina-SCI acknowledges that as a company, it has more to prove to the Street and its shareholders, attempting to dismiss the company altogether in a "three year forecast" of the EMS industry is incredibly shortsighted.
And finally, I will point out that many key industry analysts as well as investment firms do not share your opinion. Sanmina-SCI has seen a recent bump in its stock price and many funds are snatching it up as part of their profile, further supporting the idea that the stock is poised for further growth. One such firm, Cowen & Co., had this to say: "We believe the company is finally positioned for sustained margin expansion and earnings growth even with only 6% rev growth for FY09. We expect the shares to outperform the market by 25% over the next year."
In the future we can only hope that your reporting offers a more well-rounded, unbiased view and that you make at least some effort to consult with the key players before jumping to illogical conclusions.
Thank you,
[Redacted]
--END
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* Note from
* Note from VentureOutsource.com Website administrator.
This article previously displayed a link to the iSuppli article for our readers.
The link was removed once VentureOutsource.com learned one EMS industry executive quoted in the iSuppli article did not interview with iSuppli and his quote had been taken out-of-context from another venue unrelated to the iSuppli article.