Smith Barney Talks (are you listening?)
On 4/24/97 SM retained its 1H rating for COMS and USRX.
1=Buy (highest), H=High Risk (not Speculative)
Smith Barney Research Commentary
Release Date: 4/22/97
3COM* (COMS, $26 3/8, 1-H)
USRX 2q Preview and Intel announcement
Take Away Message
We are maintaining our fiscal 1997 estimate at $2.05, and
continue to maintain our fiscal 1998 estimate of $2.62 due
to our conservative stance that the merger will be neutral
to fiscal 1998 earnings. On our calendar 1997 estimate of
$2.18, the stock is trading at approximately 12x. We
continue to believe COMS should trade one times its five-
year compounded annual growth rate of 25%. On this basis,
we calculate a price target of $56.
Quarterly Preview
1) USRX is expected to release FY2Q earnings after the close
of market on Wednesday. As a result of our checks with
Compuware and several ISPs, we expect USRX to beat consensus
estimates of $0.75 versus $0.55 a year ago. However, given
the current environment for networking stocks, we would be
surprised to see USRX choose to dramatically exceed estimates.
The one potential negative investors could derive from the
quarter is a rise in DSOs. USRX will obviously attempt to bring
this down given the strong demand for its new modem and total
control hub. However, it could be assisted by the change in its
fiscal year-end to May, which is 3COM's. The merger with COMS
is expected to be completed in June.
Intel Announcements
2) We had the opportunity to speak at length with 3COM's
management. The stackable hub announcement and pricing
was exactly what they had anticipated from Intel. COMS fast
ethernet stackable lists at $175 per port. The 100 megabit
shared media stackable hub lists at $167 per port. Intel's
products list at $100 per port. The products are not
one-for-one in terms of functionality. Intel's don't have
autosensing, or software management capabilities.
Furthermore, they lack the distribution capability, installed
base, or brand indentity. 3COM will respond but given their
premium brand reputation in hubs, they are likely to price 10%
to 20% above the competition. 3COM was already expecting
this move by Intel, and therefore is already incorporated in
their guidance.
Motherboard Competition
Intel also announced samples of a single chip implementation
of fast ethernet adapter functionality on the motherboard.
3COM is also in the process of developing a single-chip
implementation for the motherboard as well. They are likely to
release a product not too far from when Intel releases a
product. Currently, 3COM provides a several-chip
implementation on the motherboard to Dell and Acer and other
OEMs. They have found that customers frequently do not
want to be locked in and PC manufacturers found that this
additional cost on the PC was wanted by some but not other
users (i.e., home users). When adapter functionality is sold as
a chip, ASPs go down, connect rates go up, and margins go up
as a percentage of sales. Therefore, net, it has been a
positive to date.
3COM over the years has learned that in addition to low cost
connectivity, customers want the best set of features and value.
This has enabled 3COM to sell at a premium and still gain
share. In addition, customers tend to want to buy from full-line
vendors. There currently appears to be no reason to change
estimates.
*Smith Barney usually maintains a market in the securities of
this company.
o~~~ O |
