Somewhere, a fellow once said good judgment comes from experience. Unfortunately, a lot of Sanmina-SCI’s experience has come from bad judgment. Another issue might be poor customer selection / recruitment / management – a lot of performance in the EMS sector has to do with how well the customer is doing in the market. Whereby, if the customer performs poorly, the EMS firm does so, too.
Unlocking value
Talk of a private equity buy-out of Sanmina-SCI has been going on for some time. There has even been rumor of acquisition of the Company by other EMS providers.
Some might argue Sanmina-SCI has $600 million to $700 million of goodwill. Looking at things differently, if you remove the goodwill you’re left with tangible value. You then might say Sanmina-SCI is also trading at a fraction of tangible value. However, one might make the assumption (and could likely be correct) this goodwill is probably from SCI and it’s most likely worthless.
Others might argue the financing market for private equity is less than desirable right now. I’m not sure this is accurate. Although not a growth industry, EMS has become attractive to private equity in recent years.
As a result, should Sanmina-SCI be taken over by private equity, someone (perhaps a tier-2 EMS provider) could later step up and buy Sanmina-SCI’s large medical EMS business if it were put on the block. (Medical electronics is one of the fastest growing segments among all outsourcing end-markets). Plexus, Flextronics, Jabil, or even Benchmark could be buyers.
Additionally, someone could acquire and unlock tremendous value of the EMS provider”s enclosures business. (Managed right, it can bring in good margins plus it supports the trend of large, and even medium-sized, EMS providers moving toward vertical integration) Acquiring, and integrating Sanmina-SCI’s enclosures business is not for the faint-of-heart. Some say it’s too embedded in factory campuses and think piecing out this part of the business would be very challenging.
When asked about the current situation and state of Sanmina-SCI, one CEO for a tier-1 EMS provider said he could turn around the Company in one week. I doubt this. Sanmina-SCI’s problems are deep-rooted. Besides, all tier-1 EMS providers are mired in challenges of their own at the moment and most are still in five-year restructuring efforts.
This article is not the first to discuss the ills at Sanmina-SCI. (Read EETimes article: ‘New Vision Needed at Sanmina-SCI‘)
Institutional investors
Just this past week, some analysts are beginning to push the Company’s stock – saying a turnaround might be in the works. You can bet they already bought their shares. One Wall Street firm speculates on what it feels could get the tide of sentiment to turn for Sanmina-SCI. First, it says Sanmina-SCI could easily reduce its debt which would be an accretive move. Then, its tax structure could see marked improvements if it can ever figure how to utilize its large U.S. net operating loss (NOL) balance sheet.
Whatever side you’re on, until Jure & Co. can show a string of quarter-on-quarter improvements, doubts about Company execution will continue. One formidable headwind in the Company’s path to success – doing EMS is not getting any easier.
Perhaps losing Sanmina-SCI would be a good thing for the industry…sort of like the air travel industry with too many airlines chasing too few passengers.
In this competitive season, let the games begin.
VentureOutsource.com, August 2008 [Updated August 14, 2009]
VentureOutsource.com
Posted at 3:31 am on August 18, 2008
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
Website administrator
Posted at 4:34 pm on August 2, 2008
* 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.