Sanmina-SCI, a long-struggling EMS provider, has been trading at a fraction of book value (asset value on balance sheet) for some time.

Some might say things are beginning to improve.

The main question, at least on the minds of investors, is whether or not the Company can turn itself around.

The question on the mind of OEM executives is whether or not the Company can execute and meet commitments.

What’s wrong?

• Sanmina-SCI has a flawed vertical integration strategy. The Company’s focus is on high-mix / low-volume products (as opposed to Flextronics and Hon Hai, which both focus their vertical strategies primarily on high-volume, low-mix consumer products)  Some in industry say a vertical integration strategy at Sanmina-SCI can work, given that Sanmina is not quite high-mix / low-volume and more like medium-mix / medium-volume.

• The person holding the CEO title is also the chairman of the Board (read: you’re unlikely to find critical discussion or opposing viewpoints in the Board room).

• Length of leadership: In 1980, Jure Sola co-founded Sanmina-SCI and initially held the position of vice president of sales. In October 1987, he became vice president and general manager of Sanmina Corporation, responsible for manufacturing operations and sales and marketing. In July 1989, he was elected as a director and in October 1989 was appointed as president of Sanmina Corporation. He’s served as CEO since April 1991, as chairman of the board of directors from April 1991 to December 2001 and, from December 2002 to present. He was co-chairman of Sanmina-SCI’s board from December 2001 to December 2002. All said, Jure Sola has been at the helm a long time. New blood would likely be a good thing, not just for opposing viewpoints but also for more robust decision-making and execution focus.

• Most members of the board have been a board member for a considerable amount of time.

• Management recently announced the board approved a potential reverse stock split in the range of 1-for-3 to 1-for-10…to be voted on at a shareholder meeting in September. [UPDATE: On July 20, 2009, the board of directors of the Company authorized a reverse split of its common stock at a ratio of one for six, effective August 14, 2009]  While a reverse stock split would be a positive for the shares in helping manage the perception of what has begun looking like a one-dollar stock. If the current Company executive team truly believes in its ability to turnaround the Company, why are they not buying back stock or some other form of common delivery of share holder value?

One other thing of noteworthy interest, CEO pay and Company stock performance is out of sync:

Source: Morningstar, company reports. 5-year change in stock price as of July 3, 2008.

To boot, analyst firm iSuppli recently disclosed reasons, compiled through industry interviews (* see comments), a company like Sanmina-SCI might not be around by 2013. To be fair, the firm also has EMS provider Celestica in its sights.

The list below reads more like excuses than reasons with each pointing to one conclusion. Poor management.

Whether it’s poor management of factories and customers and supply chains or poor management of people and finances. The list reads as: (Source: iSuppli)

• Excess industry capacity
• Cheap company valuations
• Large customer disengagements
• Operational / supply chain issues
• Regional challenges
• Tough competitive landscape
• Challenged financials
• Senior management churn
• Lack of differentiation
• Poor strategic choices

Somewhere, a fellow once said good judgment comes from experience. Unfortunately, a lot of Sanmina-SCI’s experience has come from bad judgment. Another issue might be poor customer selection / recruitment / management – a lot of performance in the EMS sector has to do with how well the customer is doing in the market. Whereby, if the customer performs poorly, the EMS firm does so, too.

Unlocking value

Talk of a private equity buy-out of Sanmina-SCI has been going on for some time. There has even been rumor of acquisition of the Company by other EMS providers.

Some might argue Sanmina-SCI has $600 million to $700 million of goodwill. Looking at things differently, if you remove the goodwill you’re left with tangible value. You then might say Sanmina-SCI is also trading at a fraction of tangible value. However, one might make the assumption (and could likely be correct) this goodwill is probably from SCI and it’s most likely worthless.

Others might argue the financing market for private equity is less than desirable right now. I’m not sure this is accurate. Although not a growth industry, EMS has become attractive to private equity in recent years.

As a result, should Sanmina-SCI be taken over by private equity, someone (perhaps a tier-2 EMS provider) could later step up and buy Sanmina-SCI’s large medical EMS business if it were put on the block. (Medical electronics is one of the fastest growing segments among all outsourcing end-markets). Plexus, Flextronics, Jabil, or even Benchmark could be buyers.

Additionally, someone could acquire and unlock tremendous value of the EMS provider”s enclosures business. (Managed right, it can bring in good margins plus it supports the trend of large, and even medium-sized, EMS providers moving toward vertical integration)  Acquiring, and integrating Sanmina-SCI’s enclosures business is not for the faint-of-heart. Some say it’s too embedded in factory campuses and think piecing out this part of the business would be very challenging.

When asked about the current situation and state of Sanmina-SCI, one CEO for a tier-1 EMS provider said he could turn around the Company in one week. I doubt this. Sanmina-SCI’s problems are deep-rooted. Besides, all tier-1 EMS providers are mired in challenges of their own at the moment and most are still in five-year restructuring efforts.

This article is not the first to discuss the ills at Sanmina-SCI. (Read also, EETimes article: ‘New Vision Needed at Sanmina-SCI‘, where writer Bolaji Ojo begins with: “Many star athletes know when to quit. Others just don’t know when to hang up their shoes until they’ve been beaten to a pulp and have to crawl away.”)

Institutional investors

Just this past week, some analysts are beginning to push the Company’s stock – saying a turnaround might be in the works. You can bet they already bought their shares. One Wall Street firm speculates on what it feels could get the tide of sentiment to turn for Sanmina-SCI. First, it says Sanmina-SCI could easily reduce its debt which would be an accretive move. Then, its tax structure could see marked improvements if it can ever figure how to utilize its large U.S. net operating loss (NOL) balance sheet.

Whatever side you’re on, until Jure & Co. can show a string of quarter-on-quarter improvements, doubts about Company execution will continue. One formidable headwind in the Company’s path to success – doing EMS is not getting any easier.

Perhaps losing Sanmina-SCI would be a good thing for the industry…sort of like the air travel industry with too many airlines chasing too few passengers.

In this competitive season, let the games begin.

[Updated August 14, 2009]

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