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Risks Keep a Lid on Sanmina

While these execution issues continue to plague the company, Sanmina also finds itself with a weak balance sheet. Total debt of more than $2 billion included $1.58 billion in long-term debt as reported in Sanmina's most recent quarterly results.

By itself this debt would not be a major issue, but Sanmina's cash flow from operations has been unimpressive to say the least. Results for 2006 show cash flow from operating activities of negative $334 million, which when combined with investing and financing activities totals negative $576 million in cash flow.

Although we don't believe this large debt and recent poor operating performance place the company in serious financial danger, it does limit Sanmina's ability to invest in significant expansion or growth-oriented initiatives, especially relative to major competitors like Flextronics (FLEX) and Solectron (SLR), which are in much better financial condition.

The numerous issues facing Sanmina, however, do not rule out the possibility that investors could make a nice profit on the shares. In fact, the Stocks Under $10 model portfolio includes a number of companies with spotty pasts that are in the midst of a turnaround -- the type of play that we call an "Inflection Point" stock.

But when considering a company that fits this category, we look at the long-term picture to see if management has a sensible plan for recapturing growth in margins, achieving profitability, gaining market share or improving other major metrics that could be a catalyst for the stock.

In the case of Sanmina, management has a history of attempts at righting the ship, only to end up turning away from its core competencies or making questionable acquisitions that end up hurting the company more than helping.

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