Sanmina currently trades at $139.85 and has been a dream stock for shareholders. It’s returned 237% since April 2021, blowing past the S&P 500’s 60.2% gain. The company has also beaten the index over the past six months as its stock price is up 7.3%.
Is there a buying opportunity in Sanmina, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Sanmina Not Exciting?
We’re glad investors have benefited from the price increase, but we're sitting this one out for now. Here are three reasons you should be careful with SANM and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, Sanmina’s 6.3% annualized revenue growth over the last five years was mediocre. This fell short of our benchmark for the industrials sector.
2. Low Gross Margin Reveals Weak Structural Profitability
All else equal, we prefer higher gross margins because they usually indicate that a company sells more differentiated products and commands stronger pricing power.
Sanmina has bad unit economics for an industrials business, signaling it operates in a competitive market. As you can see below, it averaged a 8.2% gross margin over the last five years. Said differently, Sanmina had to pay a chunky $91.77 to its suppliers for every $100 in revenue. 
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Sanmina’s ROIC averaged 3.2 percentage point decreases each year. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Sanmina isn’t a terrible business, but it doesn’t pass our bar. With its shares outperforming the market lately, the stock trades at 12.3× forward P/E (or $139.85 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at the most dominant software business in the world.
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