Prepared by Morgan Stanley Dean Witter analyst Shelby A. Fleck
SANM.OPrice (Oct. 6, 2000): $90.3852-Week Range: $119.94-37.38
We continue to recommend purchase of Sanmina shares with an Outperform rating and our near-term price target of $115. We fine-tuned our F2001 EPS estimate to $2.35 from $2.30 to reflect the acquisition of assets from Lucent Technologies, as well as modest accretion from the $750 million convertible note offering.
We continue to believe that our earnings estimates for Sanmina could prove to be conservative for a few reasons. First, Sanmina is well positioned to benefit from the trend toward outsourcing among telecommunications equipment customers (74 percent of sales in F3Q00).
Second, F4Q00 results are likely to exceed consensus expectations. Third, the company has a good track record of smoothly integrating acquisitions. We believe that cost synergies from the Hadco acquisition are beating expectations. Other recent acquisitions such as Essex (PCB assembly in Europe) and Ocean Manufacturing (PCB assembly in China) are strategically important transactions and should be accretive to earnings.
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September quarter earnings preview
The acquisition of Essex is tracking a bit ahead of plan, and we believe that acquisition of Hadco is also exceeding expectations. Lead times for printed circuit boards remain extended, and pricing has increased versus the prior quarter. Given the longer lead times, Sanmina is getting better visibility on customer forecasts.
In addition, the product mix is improving: The average layer count per printed circuit board has increased at the acquired Hadco facilities. At the time of the acquisition, Sanmina intended to reduce its sale of printed circuit boards to third parties (30 percent of revenues in F3Q00) over time and use more of its PCB fabrication capacity to serve its existing EMS customers. This transition is occurring faster than anticipated, so the percentage of bare boards sold to other companies should decline in future quarters.
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Last week, Sanmina closed the acquisition of assets from Lucent Technologies in San Jose, CA, near Sanmina's headquarters. This facility provides final systems integration and test, configuration, and direct fulfillment for Lucent and Avaya's enterprise messaging systems. This acquisition is expected to add about $150 million in annual sales, and it should add a few pennies to Sanmina's F2001 earnings. In addition to final systems assembly, Sanmina anticipates that it will provide more components such as backplane assembly, custom cables, etc., over time.
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