Executive Summary / Key Takeaways

• ZT Systems acquisition transforms Sanmina into a major AI infrastructure player, doubling revenue to ~$16B within two years while maintaining margin discipline and creating a full-system integration capability that rivals larger EMS providers.
• CPS segment's 13.9% gross margins and improving operational efficiency demonstrate successful mix shift toward higher-value components, supporting management's path to 6-7%+ operating margins and driving ROIC to an impressive 28.3%.
• Defense/aerospace/medical portfolio provides stable, high-margin foundation (62% of revenue) that counters cyclicality of cloud/AI business, supports pricing power, and enables the company to weather geopolitical disruptions better than consumer-focused peers.
• Balance sheet strength ($926M cash, 0.32x leverage pre-ZT) enables transformative acquisition, though debt will rise to 1.0-2.0x target range, creating temporary leverage risk that management must navigate carefully to maintain financial flexibility.
• Key risks include ZT integration execution at massive scale, customer concentration in cloud/AI where hyperscalers wield pricing power, and a $100M qui tam lawsuit overhang that could pressure valuation if any of these factors falter.

Setting the Scene

Founded in 1980 and headquartered in San Jose, California, Sanmina Corporation has evolved from a traditional electronics manufacturing services (EMS) provider into a specialized integrator of mission-critical systems for OEMs operating under stringent regulatory requirements. The company generates approximately $8.1 billion in annual revenue through two distinct business models: Integrated Manufacturing Solutions (IMS), which delivers comprehensive assembly and test services representing 80% of sales, and Components, Products and Services (CPS), which supplies higher-margin proprietary components accounting for the remaining 20%. This bifurcation matters because it creates a dual-engine growth strategy—IMS provides scale and customer relationships while CPS delivers margin expansion and technological differentiation.

Sanmina operates across 20 countries with 11.44 million square feet of manufacturing space, positioning it squarely in the middle tier of the EMS industry. Unlike behemoths Flex Ltd. and Jabil Inc. , which chase massive scale across consumer and automotive markets, Sanmina has deliberately targeted complex, regulated end markets where failure rates carry severe consequences. The company's revenue splits 62% into industrial, medical, defense, aerospace, and automotive sectors—markets characterized by long product cycles, deep customer relationships, and regulatory moats. The remaining 38% flows from communications networks and cloud infrastructure, where growth is accelerating at 17.1% annually but competition intensifies. This mix matters because it provides both defensive stability and offensive growth, a balance that few peers achieve. While Celestica Inc. has captured AI-driven growth with 28% quarterly revenue increases, it lacks Sanmina's diversified foundation. Conversely, Benchmark Electronics (BHE) shares Sanmina's niche focus but at one-tenth the scale, limiting its bargaining power and R&D resources.

The strategic landscape shifted dramatically in October 2025 when Sanmina closed its $1.6 billion acquisition of ZT Systems' data center infrastructure business from AMD (AMD). This transaction doesn't merely add revenue—it fundamentally repositions the company as a full-system ODM partner for AI infrastructure, directly challenging larger competitors who have been slower to integrate vertically. The acquisition's significance extends beyond the $5-6 billion annual revenue run-rate it brings; it provides Sanmina with U.S. and European manufacturing capacity optimized for hyperscale data centers, complementing its existing vertical integration strategy and enabling end-to-end solutions from PCB design through liquid cooling rack integration.

Technology, Products, and Strategic Differentiation

Sanmina's competitive moat rests on three pillars: proprietary interconnect technology, regulated industry expertise, and vertically integrated manufacturing capabilities. The CPS segment exemplifies this differentiation, delivering 13.9% gross margins in fiscal 2025—nearly double the 7.7% IMS margin. This 620-basis-point spread matters because it demonstrates the economic value of moving up the technology stack. CPS includes advanced PCBs, optical and RF microelectronics, precision machined parts, and cloud-based manufacturing execution software (42Q). These aren't commodity components; they require specialized engineering, carry higher switching costs, and enable Sanmina to capture value throughout the product lifecycle rather than competing solely on assembly costs.

The company's end-to-end solution capability translates directly into customer stickiness and pricing power. For defense and aerospace clients, Sanmina's AS9100 certification and ITAR compliance create barriers that generic EMS providers cannot easily replicate. In medical devices, FDA registration and ISO 13485 quality systems allow the company to manufacture everything from disposable wearables to complex diagnostic equipment. This regulatory depth matters because it converts one-time manufacturing contracts into multi-year partnerships spanning design, NPI, production, and after-market services. The result is recurring revenue streams and customer retention rates that materially exceed industry averages, supporting the company's 28.3% ROIC despite lower absolute scale than peers.

The ZT Systems acquisition amplifies this differentiation in the cloud and AI infrastructure market. ZT brings ODM capabilities—original design manufacturing where Sanmina co-designs systems with customers rather than simply building to spec. This is critical because hyperscale data center operators increasingly demand partners who can integrate mechanical racks, liquid cooling manifolds , bus bars , and custom memory modules into complete systems. Sanmina's existing Viking Enterprise Solutions group already provides high-performance storage platforms; combining this with ZT's full-system integration creates a capability that Flex and Jabil have struggled to replicate organically. The strategic implication is a move from component supplier to strategic partner, enabling Sanmina to capture a larger share of the $500 billion-plus annual data center investment cycle while commanding premium margins for system-level integration.

Financial Performance & Segment Dynamics

Fiscal 2025 results provide compelling evidence that Sanmina's strategy is working. Revenue grew 7.4% to $8.13 billion, driven by new program wins and ramp-ups in communications networks, cloud infrastructure, and medical end markets. This growth rate matters because it outpaced the broader EMS market's ~5% average while maintaining margin discipline. More importantly, the composition of growth favored higher-value segments: the communications and cloud infrastructure end market surged 17.1% to $3.11 billion, offsetting the more modest 2.2% growth in the industrial/medical/defense/automotive segment. This mix shift toward faster-growing, technology-intensive markets positions Sanmina for sustained above-market growth.

Margin expansion tells an equally important story. Non-GAAP operating margin expanded 30 basis points to 5.7%, with CPS leading the improvement. The segment's gross margin jumped 110 basis points year-over-year to 13.9%, driven by favorable product mix and operational efficiencies. In Q3 2025 alone, CPS gross margin surged 320 basis points to 14.7%, with management noting they are "getting very close" to their 15% target. This matters because every 100 basis points of CPS margin improvement flows directly to operating leverage, given the segment's 20% revenue contribution. The IMS segment also contributed, with gross margin rising 20 basis points to 7.7% through operational improvements and volume leverage. Combined, these gains demonstrate that Sanmina's investments in automation, factory optimization, and higher-value services are translating into durable margin expansion rather than one-time benefits.

Cash flow generation validates the quality of earnings. Operating cash flow reached $621 million in fiscal 2025, with free cash flow of $478 million representing a 5.9% FCF margin. This matters for three reasons. First, it funds the company's growth investments without excessive external financing—net capital expenditures were only 1.8% of revenue, consistent with historical 1-2% levels, showing capital efficiency. Second, it supports shareholder returns; Sanmina repurchased $113.7 million of stock in fiscal 2025 while maintaining $239 million in remaining authorization. Third, it provides a buffer for the debt-funded ZT acquisition, ensuring the company can service new obligations while continuing to invest in organic growth. The balance sheet strength is notable: $926 million in cash, no revolver borrowings, and a gross leverage ratio of just 0.32x pre-acquisition. This financial flexibility is a competitive advantage in an industry where scale requires capital.

Working capital management further underscores operational excellence. Inventory turns improved from 5.7x to 6.7x year-over-year, while inventory net of customer advances fell 12.1% to $1.1 billion. This improvement matters because it releases cash for higher-return investments and reduces obsolescence risk in technology markets with rapid product cycles. Management's ability to normalize inventory while growing revenue demonstrates disciplined execution and strong customer collaboration on demand forecasting.

Outlook, Management Guidance, and Execution Risk

Management's guidance for Q1 fiscal 2026 reveals the immediate impact of the ZT transformation. Consolidated revenue is projected at $2.9-3.2 billion, including $850 million to $1.05 billion from just two months of ZT operations. The legacy Sanmina business is expected to grow 4.7% year-over-year at the midpoint, maintaining high single-digit momentum. More strikingly, non-GAAP EPS guidance of $1.95-2.25 implies 46.3% growth at the midpoint, demonstrating significant accretion from the acquisition. This matters because it shows ZT isn't just a revenue scale play—it's immediately additive to shareholder value.

The long-term outlook has accelerated. Management now expects to double revenue to approximately $16 billion within two years, pulling forward the previous three-year timeline. This acceleration matters because it signals confidence in both ZT's integration and the underlying AI infrastructure demand cycle. The company targets 6-7%+ operating margins longer-term, up from the current 5.7%, with management explicitly stating they see "upside to that" based on the value-added solutions for data centers. Achieving this requires the legacy business to reach a $9-12 billion run-rate while maintaining CPS margins above 15% and integrating ZT at corporate-average margins.

Execution risks are material but manageable. Management plans to retain ZT's leadership team, led by founder Frank Zhang, and will integrate its engineering capabilities with Sanmina's Viking Enterprise group. This approach matters because it preserves customer relationships and technical expertise while leveraging Sanmina's global supply chain and financial resources. The company is also expanding capacity in India, Mexico, and the U.S. to support regional manufacturing trends, with a new Indian factory coming online early next year to capture cloud AI opportunities. This geographic diversification mitigates tariff and geopolitical risks that have pressured peers with concentrated Asian exposure.

Risks and Asymmetries

Three primary risks threaten the investment thesis: integration execution, customer concentration, and legal overhang. The ZT acquisition represents a step-change in scale, adding $5-6 billion in revenue to an $8 billion base. Integration risks include cultural alignment, systems integration, and customer retention. If ZT's major customers—likely hyperscale cloud providers—perceive service degradation or strategic misalignment, they could shift business to competitors like Celestica or Jabil , which are aggressively expanding their own AI capabilities. The $450 million contingent consideration also creates earnings volatility if ZT misses financial targets over the next three years.

Customer concentration amplifies this risk. The communications and cloud infrastructure segment already represents 38% of revenue and will exceed 50% pro forma for ZT. In EMS, hyperscale customers wield enormous pricing power and can insource manufacturing as Cisco (CSCO) and others have done. If AI infrastructure spending slows or shifts to alternative architectures, Sanmina's growth trajectory could decelerate faster than the diversified legacy business can compensate. This matters because it increases earnings volatility and could compress the multiple investors assign to the stock.

The qui tam lawsuit alleging False Claims Act violations in the defense business presents a binary risk. With plaintiffs seeking approximately $100 million in treble damages and penalties, an adverse ruling could materially impact cash flow and damage Sanmina's credibility in its most stable end market. While management is vigorously contesting the case and doesn't consider a loss probable, the overhang matters because defense customers prioritize compliance and any settlement could trigger contract reviews or debarment proceedings.

On the positive side, asymmetries exist. If ZT integration exceeds expectations and AI infrastructure demand remains robust through 2027, Sanmina could achieve the high end of its $16 billion revenue target sooner, driving operating leverage beyond the 6-7% margin goal. The CPS segment could surpass 15% gross margins if optical and RF microelectronics see accelerated adoption in defense and medical applications. Additionally, successful resolution of the qui tam lawsuit would remove a significant overhang and potentially re-rate the stock closer to Celestica's growth multiple.

Valuation Context

Based on trailing financials, Sanmina trades at 29.1x earnings and 0.97x sales, positioning it between growth-focused Celestica (76.8x P/E) and more mature Flex (23.4x P/E). The P/E multiple of 29.1x may appear elevated relative to the company's historical range, but it reflects the earnings power of the ZT acquisition, which management expects to be immediately accretive. The price-to-sales ratio of 0.97x is attractive relative to the EMS peer average of approximately 1.2x, suggesting the market hasn't fully priced in the revenue doubling or margin expansion potential.

Comparing operational metrics, Sanmina's 5.7% non-GAAP operating margin aligns with Flex's 5.1-5.7% and Jabil's 5.6%, while trailing Celestica's (CLS) 6-7% in its CCS segment. However, Sanmina's 14.4% EPS growth in fiscal 2025 outpaced Flex's (FLEX) decline and Jabil's (JBL) modest gains, demonstrating superior execution. The company's debt-to-equity ratio of 0.12x pre-ZT was the lowest among peers, providing substantial capacity for the acquisition. Post-closing leverage of 1.0-2.0x will be manageable given the $5-6 billion revenue base and expected cash generation.

Free cash flow per share of $9.33 represents a 5.9% yield on enterprise value, supporting both the share repurchase program and debt service. With $239 million remaining on the authorization, management has flexibility to be opportunistic, particularly if integration challenges create temporary stock weakness. The absence of a dividend allows full reinvestment in growth, a strategy that makes sense given the 46% EPS growth expected in Q1 FY2026.

Conclusion

Sanmina stands at an inflection point where strategic transformation meets operational excellence. The ZT Systems acquisition doesn't merely double revenue; it repositions the company as a full-system ODM partner in the $500 billion-plus AI infrastructure market while preserving the stable, high-margin defense and medical businesses that provide downside protection. This combination matters because it offers a rare blend of growth and resilience in the cyclical EMS industry.

The margin expansion story, led by CPS segment improvements and ZT integration, supports management's 6-7%+ operating margin target and drives ROIC that materially exceeds peer averages. Execution will determine whether Sanmina achieves its accelerated two-year revenue doubling or stumbles on integration and customer concentration risks. For investors, the key variables to monitor are ZT's customer retention rates, CPS margin progression toward 15%, and resolution of the qui tam lawsuit. If management delivers on its guidance, the stock's current valuation likely underestimates the earnings power of a $16 billion revenue base with expanding margins. If integration falters or AI spending slows, the diversified legacy business and strong balance sheet provide a floor that many pure-play technology manufacturers lack.