4. Upgrades & Downgrades Issue #80
3Com Delivers the Results, Morgan Stanley, the Upgrade
By Shannon Swingle
3COM (COMS): On Sept. 27, Morgan Stanley Dean Witter upgraded its rating on 3COM to OUTPERFORM from NEUTRAL, prompted by the data networking and Internet infrastructure company's better than expected first-quarter report for fiscal 2000, which ends in May 2001. Total revenue was $933.8 million, up 22% from the previous quarter, and well ahead of Morgan Stanley's estimate of $800 million. A key positive according to the brokerage: Revenue from 3COM's emerging wireless, voice over Internet protocol and broadband businesses grew 70% quarter-to-quarter, to $147 million, representing 18% of revenue. Morgan Stanley acknowledges that there are investment risks associated with 3COM. The company's execution has been inconsistent in recent years, and, like all vendors of networking systems, 3COM will have to deal with shortages of key components. In addition, 3COM upset some large corporate customers when it abandoned its CoreBuilder LAN switching product – customers that might avoid all of 3COM's products in the future.
But Morgan Stanley says the shares are inexpensive, using several valuation methodologies. "At a market capitalization of $8 billion (based on fully diluted shares), the company is trading at just over 2-times our calendar 2001 revenue estimate of $3.9 billion. We believe this is low given the company's portfolio of emerging, high-growth products." Using a sum-of-the-parts valuation, it values 3COM at $24 a share. What's more, 3COM has $3.6 million in cash and investments, representing more than $7 a fully diluted share. The firm has increased its fiscal 2000 revenue estimate to $3.66 billion from $3.42 billion, and its initial fiscal 2001 estimate calls for revenue of $4.24 billion. It also narrowed its estimated fiscal 2000 loss to $0.15 a share from $0.49 a share. Morgan Stanley expects 3COM to be profitable in the fourth quarter of fiscal 2000. The shares closed at $19.19 on Sept. 29. The shares are up 38% since the better than expected earnings, and rose 13% after the company announced that Bruce L. Clafin, currently the president and chief operating officer, would succeed Eric A. Benhamou as chief executive officer in Jan. 2001. Mr. Benhamou will continue as chairman. |
