fnews.yahoo.com
FOOL PLATE SPECIAL
An Investment Opinion
by Warren Gump
3COM Doesn't Adapt Quickly
Shares of networking company 3COM (Nasdaq:COMS - news) hit the skids this morning,
falling $4 to $27 1/2 after releasing earnings for the quarter ending in May and cautioning
investors about sales in the upcoming year. The company's ongoing net income of $0.24 per
share during Q4 was up 33% from last year's comparable quarter and a penny above
published consensus estimates. While that sounds positive at face value, the underlying
fundamentals don't appear quite as strong, a view reinforced by company comments in the
conference call (which you can listen to over the Web).
Fiscal Q4 sales were up only 3% over the same quarter last year. Revenues from system
products rose 17%, but sales from the client access product line declined 10%. Sales of the
higher-growth system products (which include hubs, switches, and routers) finally accounted
for a majority of sales, reaching 55% of the top line. Unfortunately, that means that 45% of
sales are still derived from client access products, such as network interface cards, modems,
and mobile PC cards, where sales are expected to continue falling.
For the upcoming year, 3COM says it expects revenue growth to be below overall industry
growth as it fights slowing sales of client asset products. More specifically, it expects negative year-over-year comparisons
revenue comparisons in the next two quarters with positive growth in the second half of its fiscal year. While gross margin for
fiscal 2000 should remain within its long-term target range of 46.5%-48% (it was 46.5% for fiscal 1999), expenses will
continue to be higher than its goal of 30%-31.5% of sales (the figure was 37.5% last year).
While 3COM is involved in an industry that has been popular with investors, the company has poorly managed technological
transitions for quite a while. Instead of enjoying the success of most industry players, the company has been struggling for over
two years to regain a competitive edge. While it does hold extremely promising technology in its PalmPilot, that product line
currently accounts for only 10% of sales. Until 3COM is able to profitably grow faster than its industry, investors will probably
be best served looking elsewhere for an investment idea. |
