Wall Street Worries About 3Com
Amid Lack of Company Guidance
By JOELLE TESSLER
Dow Jones Newswires
NEW YORK -- Amid a vacuum of guidance from the company, shares of
3Com Corp. 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.
The 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, that sales of
the company's new standards-based V.90 modems are not picking up as
quickly as expected and that 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 Mr. Duran, who believes that the
fundamentals of 3Com's business are nevertheless quite solid.
A Wide Range
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, Mr. Hill said. Fiscal
1997 earnings were $1.41.
And the average estimate for fiscal 1999 is $1.45 a share, Mr. Hill said,
but the estimates from 30 analysts range from $1.01 to $1.70.
Shares of 3Com, which were trading around 35 in early May, fell as low
as $27.875 earlier Friday, past the previous 52-week low of $28.3125 set
Thursday. The stock closed at $27.9375 Friday, down 43.75 cents on the
Nasdaq Stock Market.
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.
Inventory Problems?
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: two 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. and
CompuServe, which bought equipment from 3Com, were recently
acquired by WorldCom Inc. -- whose UUNet Technologies division,
which operates a large piece of the Internet backbone, buys products from
Ascend Communications Inc. Likewise, while Sprint Corp. uses 3Com as
a supplier, Earthlink Network Inc. -- 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.
Lower Targets
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, Mr. 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," Mr. Duran said.
Looking at 3Com's NIC operations, Mr. Lieu of Adams Harkness Hill
said he doesn't believe that pricing pressure in the PC industry will harm
3Com's adapter-card business.
Mr. 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.
Mr. Lieu added that he doesn't 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.
The company's systems business also has a solid outlook, Mr. Lieu said,
since 3Com 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. |
