Sanmina-SCI Remains a Sell
Sanmina-SCI Corporation (SANM) provides end-to-end electronic manufacturing services (EMS) including product design, engineering, testing, volume production of systems, components, and subassemblies, as well as after-market services and support.
The company has shown some growth in its core EMS segment and has a reduced cost structure. But it is currently struggling with industry-wide weakness. After exiting its PC business, Sanmina will focus on its core business and margin improvement.
Sanmina-SCI Corporation's shares are currently trading at 11.5x our 2008 EPS estimate of $0.14. On a P/S multiple, the stock is trading at 0.1x our 2008 revenue/share estimate of $15.26. This P/E multiple is below the industry averages, but in line with some of its closest peers.
Sanmina targets operating margin of 4% with a double digit gross margin growth. In order to achieve this target the company will need to grow its top-line, at which point we could become more positive. Moreover, we believe that the outlook for the industry is poor as core sectors continue to face sluggish demand coupled with fewer acquisitions.
Although the sale of its PC business will help Sanmina as it eliminates a slowing business, we believe it is still too early to get involved in SANM stock until we get a clear outlook on how the remaining business performs on a standalone basis. Given a weak economic environment, we maintain a Sell recommendation on SANM shares. Our six month price target remains $1.00.
CEMEX Struggles to Firm Up
We are keeping our Sell rating on CEMEX, S.A. de C.V. (CX). Second quarter results were weak. The continued weak cement volumes in Spain, U.S. and Mexican markets are problematic. Higher-than-normal rain, affected volumes during the second quarter 2008.
The short-term outlook for the company remains highly uncertain based on the downtrend in the residential, industrial/commercial sector and the infrastructure sector as well as due to the real estate prices in Spain, U.K. and U.S. We believe that the recent takeover of the Venezuela subsidiary by the government is also troublesome.
Sales as per volume of cement and ready-mix were disappointing, mainly in Spain. The guidance for 2008 seems too optimistic when compared to the current economic environment in the U.S. and throughout the world. The possibility of a recession in the U.S. in the short-term is real and could affect Mexico due to the economic ties of the two countries.
CEMEX announced that US$400 million synergies by early 2009 in the integration with Rinker Group Limited should improve results in the short-to-medium term. Apart from its expansion plans, CEMEX has been growing through acquisitions.
