Upgrade Sends Sanmina Higher - TheStreet

Upgrade Sends Sanmina Higher

The contract manufacturer has moved into designing products on spec.
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Boosted by an upgrade and positive buzz following an analyst's day, contract manufacturer

Sanmina-SCI

(SANM) - Get Report

gained 53 cents, or 5%, to $10.55 a share in on Wednesday.

Needham analyst John McManus upgraded the San Jose, Calif., company to buy from hold and raised his target price to $13 because "demand across the board is increasing faster than we imagined, and its component areas such as high-end motherboards and enclosures can contribute over a 20% gross margin and 10% operating margin." (Needham does not have a banking relationship with Sanmina).

A number of analysts who attended the company's annual briefing on Tuesday said they were impressed with the company's new Original Design Manufacturer (ODM) program. Traditionally, contract manufacturers build products using the manufacturers design, or are paid to design a product. Original design manufacturing means that the contract manufacturer designs a product and then sells that design to a customer.

The upside for the contract manufacturer tends to be higher margins, because an ODM retains rights to the design and can resell it. The downside, of course, is risk: If a design doesn't sell, the ODM eats the cost.

This year, ODM work will account for only about $300 million in sales for Sanmina, (Wall Street is expecting annual revenue of more than $11 billion) but should carry an operating margin of 10%, compared with the company's overall target of 6% to 8%, the company said. Sanmina's target for future ODM sales is 20% of revenue, but the company did not give a time frame.

Deutsche Bank analyst Chris Whitmore was skeptical, saying in a note that the ODM initiative "is aggressive given its largely unproven offering, in what is becoming a fiercely competitive market." However, he also said that "We like SANM's strategy and think they are taking the appropriate steps to compete in the evolving EMS/ODM industry." Whitmore, whose company has a banking relationship with Sanmina-SCI, maintained his sell" rating.

Alex Blanton of Ingalls & Snyder said recent news out of Sanmina points to a growing recovery in electronics. He noted that weekly orders for high-end circuit boards jumped from an average of $5.4 million in July to $9.2 million over the most recent four-week period. "That's good news for the industry as well as Sanmina," he said in an interview.

Sanmina-SCI sells those boards to other contract manufacturers as well as to equipment manufacturers, and the order spike indicates an uptick in end-user demand, Blanton said. His company does not have a banking relationship with Sanmina-SCI.