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Technology Stocks : 3Com Corporation (COMS)

COMS 0.00130

+1,200.1%

Nov 7 11:47 AM EST

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To: Andreas Helke who wrote (11670)	12/5/1997 9:44:00 PM
From: craig crawford	Read Replies (5) of 45548

<< The inventory levels were out of control. 3Com intends to fix this problem and will therefore have one really bad quarter >> This isn't just a coincidental event. The inventory levels were out of whack because USRX/COMS couldn't sell their products. They did it on purpose and misled shareholders/thestreet in the process. << But this is pretty much a one time effect. >> I don't believe that it is. COMS has missed just about every quarter this year. The 3Q that ended Feb 28 was marked by the earnings warning on Feb 10th. Estimates came down from 63 cents to 46 and COMS posted 47. They totally missed that one. The 4Q ending May 31 COMS matched the first call estimates of 48 cents, (which got cut after the prior Q's debacle) but there were plenty of troubling issues in the report. DSO jumped from 50 to 58 showing the company back-ended their Q to meet estimates. I'll give COMS the benefit of the doubt and say they made this Q. Q1 Ending Aug 31 COMS came in at 48 cents again but prior to taking a $426 million dollar charge, part of which included cancelled sales. In effect USRX had been stuffing the channel to overinflate their revenues and not disappoint the street. They got to take credit for the sales in prior Q's. But when it came time to pay Paul with the money robbed from Peter COMS didn't have to show any decrease in revenues for the cancelled sales. They chose to mention in a footnote that USRX had only $15.2 million in sales for 2 months and then hid some of the cancelled sales in the charge (of course they didn't specify how much). They elected to take a hit to retained earnings to reconcile the balance sheet. Obviously COMS monkeyed with the books to come out with 48 cents a share. It is no coincidence that they pegged the number right on. They took as big as a charge as they could while still "matching" estimates. They stated in their 10Q "Revenues for the two-month period were below historical revenue trends due primarily to the desire to reduce levels of channel inventory and conform sales return and allowance reserve philosiphies with that of the heritage of the 3Com organization." It is obvious that COMS used part of the hefty charge they took to reduce channel inventories last Q. THAT STILL WASN'T ENOUGH. They had to warn about a "minimal profit" this Q to reduce the channel some more! To make matters worse they said they are going to need another couple hundred million next quarter to do it again! These guys are incredible. Basically COMS is just trying to fix a years worth of USRX problems. Obviously they are going to miss this Q and the next one too. So what do we have? Q3 '97.....47 cents Q4 '97.....48 cents Q1 '98.....48 cents (before a $426 million charge) Q2 '98.....2-5 cents? Q3 '98.....20-25 cents? Does this look like a growth story to you? This hardly looks like a one-time event to me. Why does this company deserve a multiple above 30 on F98 earnings? It looks like COMS will barely break a $1 for F98. At COMS current price of 36 they will have to earn $1.20 just to have a PE of 30. Let's be a little generous and say that COMS does: Q1...48 (already reported) Q2...05 (generous number if you ask me) Q3...25 (generous again) Q4...42 (considering Asian problems generous again) to add up to $1.20. They are still trading at a PE of 30 on those earnings. Even at lofty levels C$CO looks like a better buy. Yes, folks Santa Claus is in full effect. The only thing COMS has done right lately is wait so long to warn (the quarter was already over) that they had the most forgiving market on their side. God help you all if they would have reported their problems in a timely responsible way the way they should have.

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