Reiterate Buy From First Call Corporation
Local-Area Networking
3Com Corporation
(NASDAQ-$28 3/8-COMS)
Company Update
May 22, 1998
Reiterate BUY
Previous New
May qtr EPS: $0.22 $0.22 Date: May 22, 98
Fiscal 1998 EPS: $0.69 $0.69 Price: $28 3/8
Fiscal 1999 EPS: $1.57 $1.57 52-wk high: $60
May 1999 target: $53 $53 52-wk low: $28
Target P/R: 2.5 2.5 Market cap.: $10 bn.
Target P/E: 28 28 Fiscal year: May
Growth: 22% 22% Debt / equity: 2%
3Com Fundamentals of Chips, Software and Distribution are Solid
_ 3Com shares flirted with a new 52-week low yesterday, closing down $1 1/2
to $28 3/8 per share.
_ Our recent channel checks confirm 3Com's market lead in all four major
business lines.
_ We continue to feel the fundamentals at 3Com of chips, software and
distribution are solid.
_ We are leaving our estimates, targets and rating unchanged. We continue to
rate 3Com a BUY.
Shares of 3Com closed down $1.50 yesterday flirting with a new 52-week low and
closing at $28 3/8 on normal volume. This was the eighth down day for the stock
in the last eleven trading days on little substantive news from the company.
What's wrong with 3Com? Maybe nothing.
Our sources confirm that 3Com still leads in their four primary markets. In
network interface cards the important product is the 10 / 100 megabit-per-second
(Mbps) PCI bus NIC. According to an industry analyst, the internal version of
this product at 3Com leads the nearest competitor by roughly two-to-one, and
3Com sells the chip only version to Dell Computers and others for inclusion in
their desktop business computers. In the LAN market, our distributor contacts
tell us that the 3Com products are "incredibly popular" and we understand that
the 10 Mbps and 100 Mbps stackable hub products are the defacto standard with
leading market shares. For 56 kilobit-per-second (Kbps) modems meeting the new
V.90 standard, according the industry analysts 3Com again has the leading share,
and we have confirmed that 3Com has practically the only standards-compliant
product on the market. 3Com has successfully managed channel inventory so that
this new product is on the shelves today and not waiting in warehouses for
obsolete product to sell out to make room on the shelves. Anecdotally on the
remote access concentrators, a distributor told us recently that the Total
Control remote concentrator products are the hottest remote access products in
that space ahead of Ascend and Cisco. So, from our checks with the channel and
industry analysts, in the current quarter 3Com still holds a market share lead
in all four business areas, NICs, low-end LANs, modems and remote access.
Our thesis in local-area networking is that excellence in software, chips and
distribution are critical for a successful business. We believe these
fundamentals at 3Com are solid. Our confidence in the company's software talent
is supported by a recent award for 3Com Transcend Enterprise Manager, a
software-based product, in the May 15 issue of Network Computing, a leading
industry publication. The same issue featured the company's new layer 3 switch,
CoreBuilder 3500, on the cover and awarded 3Com product of the year in
networking. The 3500 is based on 3Com internally developed chips and confirms
our position that chip design at 3Com is world class. 3Com distribution is
rarely questioned and was confirmed for us yesterday by an industry analyst who
stated that 3Com had the strongest brand in the channel.
We are leaving our revenue and earnings estimates unchanged. Our revenue
estimate remains unchanged at $1.4 billion for the May quarter based broadly on
a PC growth rates in NIC and modem businesses and industry growth rates in
systems products that inlcude LAN and remote access. Based on recovering
operating margins we expect earnings in the May 1998 quarter of $0.22 per share,
compared to $0.45 a year ago. This translates in our estimation to $0.69
earnings-per-share from operations for the May 1998 fiscal year. We are
maintaining our earnings estimates for May 1999 of $1.57 and $2.35 for May 2000.
Based on 2.5 times revenues and then 28 times earnings we are maintaining our
$53 May 1999 price target. We reiterate our BUY rating on the common shares of
3Com.
First Call Corporation - all rights reserved. 617/345-2500
END OF NOTE
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