BofA Securities raises Sanmina-SCI stock price target to $120 on ZT systems deal

BofA Securities raised its price target for Sanmina (SANM) to $120 from $100, while maintaining a Neutral rating, following the strategic acquisition of ZT Systems' data center infrastructure business from AMD, which is expected to significantly boost Sanmina's cloud and AI revenue and full-system assembly capabilities. This positive development comes despite Sanmina reporting mixed Q2 results, with earnings and revenue exceeding expectations but Q3 guidance falling short of analyst estimates. BofA's sustained Neutral stance balances the acquisition's growth potential and a recovering communications market against ongoing macroeconomic weakness and the need for new program ramps to materialize.

Analysis

Sanmina Corp. (SANM) presents a mixed outlook, characterized by a strategic, long-term growth initiative clashing with near-term operational and macroeconomic headwinds. BofA Securities has acknowledged the company's potential by raising its price target to $120 from $100, primarily driven by the planned acquisition of ZT Systems' data center infrastructure business from AMD. This M&A activity is expected to significantly enhance Sanmina's scale in the cloud and AI sectors and add full-system assembly capabilities. The company's recent performance includes a solid second quarter, with adjusted EPS of $1.41 and revenue of $1.98 billion beating consensus estimates, alongside strong free cash flow generation of $126 million and an $84 million share repurchase. However, this is counterbalanced by a cautious third-quarter forecast, with both earnings and revenue guidance falling short of analyst projections. BofA's decision to maintain a Neutral rating reflects this dichotomy, weighing the potential benefits from the acquisition and a recovering communications market against persistent macro weakness and the execution risk associated with ramping new programs in the fiscal second half. The stock's significant 52.84% appreciation over the past year to near its 52-week high further complicates the investment case, with an InvestingPro analysis suggesting a slight overvaluation at current levels.

Key Decisions for Investors

• Investors should weigh the long-term strategic benefits of the ZT Systems acquisition and increased AI exposure against the immediate risks highlighted by weak Q3 guidance and a challenging macro environment.
• Monitor the successful closing of the ZT Systems acquisition by year-end and look for evidence of new program ramps materializing in the fiscal second half, as these are critical catalysts needed to support the stock's recent run-up.
• Given the stock is trading near its 52-week high and is flagged as potentially overvalued, it may be prudent for investors to await a more attractive entry point or confirmation of improved operating momentum before initiating or adding to positions.