Before we make any hasty conclusions let us cogitate the earnings results and circumstances facing the company. It is not new to any of us that the current sentiment and earnings are far from rosy, but let us extrapolate the truth from the hyperbole.
The economy has slowed down, which is to be expected, but we are far from being stagnant and the economic outlook appears to be very good. There is no Cold War and little international tension. The world is more integrated and harmonious than it has ever been in the history of civilization. Nevertheless, exponential growth is an anomaly and only a fool would expect this momentum to be perennial. We all know that eventually everything ends up in a zero sum game when we have finite parameters.
Having said the aforementioned we should note that sound investment principles will return as the norm when it comes to investing. Buying stocks at stratospheric values predicated purely on a company's potential is the most precarious method of investing. This we have all witnessed throughout history but we keep on repeating the same mistakes. Fundamentals have always prevailed, but fundamentals without direction can also be just as precarious.
3Com had the fundamentals and requisite vision to know that change was necessary. For this reason they embarked on some drastic changes to restructure the company for the coming millennium. They decided they needed to be more focused, hence, they spun of the Palm, divested many of their legacy products and used their proceeds to amass a very respectable war chest of $3 billion which has been used prudently to settle an old law suit and make acquisitions that are in conformity with the new DNA of the company.
We all knew that the 3rd. Quarter has always been historically the slowest Quarter of the year. We also were warned that earnings needed to be readjusted predicated on the uncertainty and consolidation taking place in the world of Telecom. We also knew that 3Com was planning on layoffs in areas that they felt redundancy and that these layoffs would have costs such as severance pay.
Now why have we held on to the stock under these circumstances?
1. Because the company is very well positioned in many emerging markets, such as Wireless, Broadband (ISDN, Cable, DSL and last but not least Optical Ethernet which is slated to be 10 times faster than Cable and DSL), VoIP, LAN Telephony and Home Networking. These are areas that we all know will have exponential growth and 3Com is a Vanguard in each and everyone of these fields. Most of these are still in there nascent stages but 3Com has already carved a leadership position in most of them.
2. Solid financials to support their goals. With over $3 Billion in cash and investments, even after the decline of their portfolio of investments, they are one of a few companies that have the potential to weather the storm and emerge triumphant. Predicated on my due diligence I feel they will prevail and for this reason I have increased my risk in the stock.
3. This is a company with 20 years of history and revenues in excess of $3 Billion. All they have to do is cut back on their payroll and discretionary expenditures and they will be back in the black.
4. The slow down in Telecom is nothing but a reprieve, believe it or not it enables 3Com to catch up with some of its' rivals in areas they feel they might be lagging. When the consolidation in this area is complete, which I surmise to be consummated within a few quarters, the Telcos will be compelled to go on a spending rampage if they wish to be competitive in the next generation of communications. They have already spent billions if not trillions on fiber that is not giving any of the value added services that was supposed to enable them higher revenues, ergo, recuperate on the capital expenditures incurred in their new fiber etc..
5. 3Com has almost reached the end of its' restructuring program, which I suspect reached its' nadir this quarter. I am certain that 3Com will recover handsomely from here on.
6. Remember 3Com is trading at its' cash value and at a fraction of its' book value while almost all other tech companies are trading at multiples of their book value.
Conclusion, with the stock trading at just over $7 a share, less than what it has in cash per share ($7.2) how can we be so pessimistic when we know very well the Book Value which includes its' other assets such as investments and real estate are worth at least another $5 per share.
Lets look at it another way, if the company ceased to do business as of tomorrow each share holder would get approx. $12-$15 per share in cash. This is putting little value in their patents, goodwill and intangible assets. |
