Overview 30-DEC-97 S & P report has good neutral summary--you may have all seen this but it thought i would post anyway.
......sounds like a good long term investment and a risky short term trade to me.....
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Projected growth in FY 98 (May) revenues has recently been cut to 20%, from 40%, to reflect several factors. A buildup of excess inventory of COMS products occurred because of weak demand from troubled Asian economies and a delay in the industry standard for its new high-speed (56K) modem. The inventory correction, which robbed revenue growth in the second quarter, will also be a factor in the third, but we believe weakness in Asia-Pacific (about 10%-15% of revenues) could prove a longer-term issue and could dampen growth to the 20%-40% rate, versus prior expectations of 30%-50%. Still, new product launches (specifically, the Corebuilder 3500) could take off faster than we predict. Gross margins will also be around 45%-46% until improving to the 48%-50% goal in FY 99. We also project an effective tax rate of 35%. Based on these assumptions, we estimate FY 98 EPS of $1.22 (excluding a first-quarter charge).
Valuation 30-DEC-97
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We recently downgraded our opinion on the shares to hold, from buy. We consider the inventory problem regarding 56K modems as temporary and view the company's quick, decisive actions to correct the situation and improve its visibility regarding sales through these channels as a positive that could make our earnings estimates prove conservative. However, the impact of Asia's weakened economies on earnings and the psychological overhang on COMS shares imply a higher level of risk, at least for the short term, that warrants caution. We continue to like 3Com's long-term outlook, and the shares are very attractive on a P/E basis if our EPS estimates do prove too conservative, but we would not add to positions currently, given the risks mentioned above. |
