Monday, November 3, 2014

Research: SANM Sanmina. Another Boring Company Which Prints Money

SANM Sanmina is I like, and it's the best kind, the boring kind. Basically, they manufacture circuit boards. They build what's behind the curtain, and most of us will never hear about them, but we definitely use their stuff. They're good at one thing. Printing lots of money. You want to pay as little as you can for a money printing machine that prints as much money as possible. Here's one of the better models. SANM was significantly below intrinsic value a little while ago, but right now, it's right at intrinsic value. Purchasing at intrinsic value has a good chance of getting you that 15% return on investment that we all need to aim for.

10-K for reference
https://www.sec.gov/Archives/edgar/data/897723/000089772313000023/sanmina10-k.htm

Overview

Sanmina Corporation (“we” or “Sanmina”) is a leading global provider of integrated manufacturing solutions, components, products and repair, logistics and after-market services. They provide these comprehensive offerings primarily to original equipment manufacturers, or OEMs, in the following industries; communications networks, computing and storage, multimedia, industrial and semiconductor capital equipment, defense and aerospace, medical, clean technology (CleanTech) and automotive.

Two segments
-Integrated Manufacturing Solutions (IMS). IMS is a reportable segment consisting of printed circuit board assembly and test, final system assembly and test, and direct-order-fulfillment. This segment generated 80% of our total revenue in 2013.

-Components, Products and Services (CPS). Components include interconnect systems (printed circuit board fabrication, backplane and cable assemblies) and mechanical systems (enclosures, precision machining and plastic injection molding); Products include memory and solid state drive products from Viking Technology, defense and aerospace products from SCI Technology, storage products from Newisys and optical and RF (Radio Frequency) modules; and Services include design, engineering, logistics and repair services. CPS generated 20% of our total revenue in 2013.

Notable Risks
-Top 10 customers account for over 50% of net sales from 2011 to 2013
-Alcatel Lucent is more than 10% of net sales
-Seasonal business, 2nd half of year has higher sales
-Certain employees have access to, or signature authority with respect to bank accounts or other company assets. (page 27 in 10-K)

Notable Accounting Issues
-158M of valuation allowance attributable to deferred tax assets and net operating losses were released in 2013. This resulted in a large jump in net income needs to be taken into account in order to accurately estimate future earnings.
-DSO for collectibles is 55 days for 2013
-No off balance sheet arrangements
-defined benefit pension underfunded by 22M
-Only a 3.78% discount rate is used, which seems lower than peers
-No goodwill / intangibles balance

Stock Ownership
-Invesco owns about 10% of stock
-directors as a whole own 4.26%

Valuation
-Modified Shareholder Equity - I've given SANM a value of 678M for their modified shareholder equity. This is calculated as the full value of cash plus a 20% haircut to their non cash assets, minus the full value of their liabilities. This is 467 + (3313 - 467) * .8 - 2066 = 678. This compares to the Shareholder equity of 1246M on their balance sheet and gives a significant margin of error.
-Value of profitability - I've given SANM a value of 1460M for their ability to generate money. SANM has a free cash flow of about 219M in the most recent year. By turning this into a perpetuity using a 15% discount rate, we get 219 / .15 = 1460.
-Intrinsic value - The intrinsic value is the value of equity plus the value of profitability, which is 678 + 1460 = 2138M

Conclusion
-Intrinsic value per share - $25.40.  The calculated intrinsic value per share with the embedded 15% discount rate and a 20% discount on assets is 2138 / 84.15 = $25.40. This is a very conservative estimate to accommodate a reasonable margin of error and compares with the current market price of 25.12.

Disclosures
-I currently hold a long position from Oct 3rd at $20.97

3 comments:

  1. Hi mate.

    You have 0 growth in DCF.

    Are you just building in safety?

    ReplyDelete
    Replies
    1. That's right, it's to help create a margin of safety. Most of my estimates assume 0 growth, so that the valuations that I get are reasonably conservative, even when I'm wrong.

      Delete
    2. Thanks RI,

      Keep posting, it's a good website.

      Liked your take on income disparity btw!

      Delete