3Com Shares Continue To Slip Amid
Vacuum Of Info
Dow Jones Newswires
No further information is available at this time.
By Joelle Tessler
NEW YORK (Dow Jones)--Amid a vacuum of guidance from
the company, shares of 3Com Corp. (COMS) have slipped over
the past two weeks, leaving analysts with a wide range of
opinions on how business is going for the maker of networking
equipment.
3Com's shares, which hit a new 52-week low Friday, have been
falling since company officials met with analysts at the Networld
+ InterOp networking conference in Las Vegas two weeks ago.
Although 3Com executives have given Wall Street little official
guidance, several analysts came away from these meetings
concerned that gross margins will remain under pressure in the
near term, sales of the company's new standards-based V.90
modems are not picking up as quickly as expected and inventory
levels are still inflated.
Still, a number of analysts maintain that 3Com's four key
operations - network interface cards, or NICs; modems; systems
products; and remote access products - are doing well and that
the company should be able to overcome the recent bumps in its
business during the next six months.
But with 3Com declining to say much to Wall Street, there is a
sense of "overall concern and nervousness" surrounding the
shares, acknowledged Lazard Freres & Co. analyst Michael
Duran.
"In a vacuum, people get nervous," said Duran, who believes that
the fundamentals of 3Com's business are nevertheless quite solid.
The hazy outlook for the company has resulted in a very wide
range of earnings estimates.
First Call Research Director Chuck Hill said the numbers from
the 32 analysts providing estimates for the company's fiscal
fourth quarter, which ends this month, run from 8 cents a share
all the way up to 24 cents; the average is 18 cents. In the
year-earlier quarter, the company earned 12 cents a share.
The average estimate for fiscal 1998 is 69 cents a share, based on
32 analysts' estimates ranging from 60 cents to 78 cents, Hill
said. Fiscal 1997 earnings were $1.41.
And the average estimate for fiscal 1999 is $1.45 a share, Hill
said, but the estimates from 30 analysts range from $1.01 to
$1.70.
3Com's shares, which were trading around 35 in early May, fell
as low as 27 3/8 earlier Friday, past the previous 52-week low of
28 5/16, set Thursday. The stock recently stood at 27 3/4, down
5/8, or 2.2%, on Nasdaq volume of 4.3 million shares, compared
with a daily average of 7 million.
No further information is available at this time.
According to one analyst, Wall Street's concerns about 3Com
center on several key points.
First, analysts worry that the company's gross margins may not
improve over the near term because of weak sales of systems
products - which include Ethernet switches and modem systems
- and continuing adjustments to inventory levels.
Looking to bring down bloated inventories, 3Com slowed
shipments into the distribution channel earlier in the year,
resulting in disappointing operating earnings for the fiscal third
quarter: 2 cents a share, compared with 50 cents a year earlier.
The company also put in place a new model that calls for lower
inventory levels.
One analyst said margins could also be hurt by networking
companies' increased selling of adapter cards and modems
directly to PC manufacturers for installation in their machines
before shipping, since the original equipment manufacturers can
extract purchasing discounts.
Second, analysts are concerned that 3Com is facing
distribution-channel inventory problems with its Total Control
remote-access products. One analyst also raised the possibility
that 3Com could lose some business in this product line as some
of its customers merge with Internet service providers and
carriers that use different suppliers.
For instance, he said, the network operations of America Online
Inc. (AOL) and CompuServe, which bought equipment from
3Com, were recently acquired by WorldCom Inc. (WCOM) -
whose UUNet Technologies division, which operates a large
piece of the Internet backbone, buys products from Ascend
Communications Inc. (ASND). Likewise, while Sprint Corp.
(FON) uses 3Com as a supplier, Earthlink Network Inc. (ELNK)
- the ISP that in which it recently took a 30% stake - buys from
Ascend.
In addition, several analysts said it appears that sales of 3Com's
new v.90 modems are not picking up as quickly as expected this
quarter. Wall Street has had high hopes for sales of the modems,
which are based on the new 56K standard, since many consumers
had held off purchases until the standard was adopted.
Adams Harkness Hill analyst Peter Lieu said 3Com is looking for
sequential growth from the $1.25 billion in revenue it reported in
its fiscal third quarter, although it doesn't yet know if it will
achieve this, since the quarter appears to be back-end loaded.
Despite the concerns on Wall Street, Duran of Lazard Freres
maintained that 3Com's business is strong. For one thing, he is
confident that 3Com has succeeded in bringing its inventory
levels down in line with its new, lower targets.
"It was cleared up as of the end of the last quarter," Duran said.
Looking at 3Com's NIC operations, Lieu of Adams Harkness Hill
said he does not believe that pricing pressure in the PC industry
will harm 3Com's adapter card business.
Lieu added that he expects sales of v.90 modems to pick up over
the next six months as more and more Internet service providers
adopt 56K technology. Consumers have been slow to buy the new
standards-based modems because many ISPs are still upgrading
their own equipment.
Lieu added that he does not see asymmetric digital subscriber
line, or ADSL - a technology designed to dramatically speed up
Internet data transmission to PC users over home phone lines -
as a major threat to 56K modem sales this year because the
service is not available in many areas.
3Com's systems business also has a solid outlook, Lieu said, since
the company has two new layer 3 switches - the CoreBuilder
3500, which started shipping in the latter part of 1997, and the
CoreBuilder 9000, which is shipping this spring.
Finally, Duran said "anecdotally on the remote access
concentrators, a distributor told us recently that the Total
Control ... products are the hottest remote access products in that
space" ahead of competing products from Ascend and Cisco
Systems Inc. (CSCO).
-Joelle Tessler; 201/938-5285 |
