David, I find your missives to be one of the most rational and objective, hence, I would like to propound the following analysis and question to you. How can anyone with the right mind write 3Com off? Even if you have a negative outlook toward the company there are many fundamentals associated with value that the investment community is overlooking.
Just ask yourself these questions and then ascribe some rational value to them.
1> Does 3Com possess over $3+ billion in cash?
2> Does 3Com have another $3+ billion in investments?
3> Does 3Com have $800 million in receivables?
4> Are 3Com's Emerging markets segments in VoIP,LAN telephony, Home Networking, Broadband and Wireless growing fast enough to replace loss in sales attributed to their legacy products, such as modems and NIC's.
5> What is the value of 3Com's patents?
6> What is the value of its brand recognition?
7> Can you place any value on its distribution channels
8> What value do you attribute to its Carrier(Networking) & Legacy divisions?
9> How do you value Palm?
For investors who are not influenced by the FUD promulgated by the shorts, they will see plenty of value by answering each of these questions.
I am going to be conservative in my evaluation of the aforementioned 9 points. It should also be noted that for every billion dollars attributed to the company we can ascribe $3 to the share value.
The answer to the first 3 points are manifested everywhere if anyone wishes to do a little dd, 3Com has close $7 billion in liquid assets and over $3 billion of that is in hard cash. This contributes $21 a share.
Line item #4, the Emerging markets, according to their last 10Q this area was growing at 47% Q on Q, if last quarter's growth rate and revenues are any indication then this area should have revenues in excess of $500 million. Because of the growth rate and high margins in this area I will give it a multiple of 4X sales. That ascribes $2 billion, which is another $6 a share.
Line items 5,6, and 7 are associated with Brand recognition, distribution channels and patents. Conservatively I would ascribe another $2 billion. that is another $6 a share.
Line item #8 should be given a 1X sales multiple, I would surmise that would leave us with $4.5 billion, that would leave us with more than $12 a share. It should be also noted absent of growth this area is producing gross margins over 45%. That is much higher than Dell which is trading at a much higher multiple.
3Com without Palm has a base value of $45+ per share.
Now lets analyze line item #9, that is the Palm. What are the parameters:
a> leader at what it does
b> almost a near monopoly
c> has critical mass
d> over 40,000 developers
e> sold more than 6 million devices
f> globally accepted standard
g> competition, mainly vapourware
h> Palm VII, still the best wireless device available and believe it or not cheapest
i> PalmOS has over 85% of the PDA market
j> Palm.net is the largest wireless portal
k> PalmOS has distinguished licensees such as IBM, Nokia, Sony, Motorola, Qcom, Symbol, Handspring.
l> Already a profitable entity with no debt and positive earning. growing at over 100% annully.
In relative terms if we are to give value Palm's current value at $70 per share would not be exaggerated, just look at other wireless companies. RIMM has a market cap close to $10 billion and AETH over $8 billion. But as I have indicated for the sake of conservative investing lets attribute $25 billion to Palm, that would give us a per share value of $44.
Now if we are to surmise based on company reports and interviews a 3Com:Palm ration of 1:1.5 is well founded. That would mean for every 3Com share we would get one and a half Palm shares. Doing the arithmetic I get a Palm valuation for every 3Com share I we own of 1.5($44) = $66, this is a far cry from what the current market attributes to the Palm, which would be 1.5(70)=$105.
So the current value of your 3Com shares including their inherent value of the Palm would be $45 + $66 = $111. Folks this is truely a very very conservative estimation. Don't be fooled by all the FUD (Fear, Uncertainty & Doubt) being promulgated by the shorts and professionals that 3Com is finished. Just look at the facts, first why is the line item associated with institutional ownership increasing, in my last count they owned over 55% of the company stock, while insiders owned over 5%. Last months fiqures were closer to 38%, that means institutions have increased their holdings by more than 50% in the last month alone. Last week they increased their holdings again, nevertheless, it was an increase in institutional ownership.
Now lets be on the safe side and multiply this by a factor of safety of 75%, that would still leave us with a vulue of (.75)$111=$83. How much more conservative can anyone be.
Any rational responses would be appreciated. |
