A little calculus based on the current financials and plans.
If the 3Com is truly able to pull off a savings of a billion a year from its' current expenditures and obligations the company should easily fall back to positive earnings. Let's just do a little math, based on the aforementioned we would have savings of $250 million a quarter. This translates into 73.5 cents a share, if we assume that current negative earnings of 33 cents continues that would leave us with 40.5 cents in positive earnings each quarter. This multiplied by 4 would leave us with annual earnings of $1.62. Now lets be extremely pessimistic and assume the economy is going into a depression and deduct 50% of the $1.62, we would be left with 81 cents. This would leave us with a PE of 7 at current prices.
Now how much more pessimistic can one get?
Now let us be realistic, if the company is correct based on the following:
"The abruptness and severity of the current technology slowdown has clearly impacted 3Com," said Bruce Claflin, president and CEO. "While 3Com has maintained or increased market share in its key segments, these gains were not sufficient to offset the decline in the industry. Therefore, 3Com is taking immediate steps to reduce costs and achieve profitability."
This is ample proof that 3Com's restructuring is well on its' way absent of an economic slow down, which is unequivocally not 3Com specific.
In an economic slow down it is relatively easy to cut costs but near to impossible to grow, so if your valuations are predominately based on momentum which is associated with growth you will be in a lot of trouble, hence those company that are trading at historically high multiples should and will experience a great deal of volatility.
What 3Com is about to do, is feasible and easy to do, it will ensconce the company until the next spurt in economic growth.
Value, Value, Value, that is if you are looking for value, this is where you should be buying. |
