Steve,
Due to my day job, (I am not an active trader),
I was unable to watch the market today. Usually
when this happens I see a 2 pt drop<gg>...but today
it worked the other way, so I'm pleasantly surprised,
though who knows if it'll last...
Here's an interesting article from Briefing.Com.
I haven't had time to read it fully, and I don't put
too much weight on their analysis (they just tell
the public what they want to hear). But it's interesting
that a beat-into-the ground stock has earned it's
way into a feature article of the day for this
popular research group. You'd think, with all the
bigger news around, they'd have something else to
write about. I don't think they even mentioned the
merger rumour... Food for thought, that's what I
take it as....
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Updated 18-Jun-98
3Com's Hollow Victory
War Not Worth Winning,
Some wars aren't worth fighting, let alone winning. 3Com's fight for control of the modem/NIC turf in the networking industry is proof in point. Opting not to pursue an all-out war with industry leader Cisco in the higher margin product segments such as switches and routers, 3Com's strategy was to gain market share dominance in the low-margin modem and networking interface card (NIC) businesses. To do so, it acquired modem giant U.S. Robotics. While the merger with U.S. Robotics helped the company achieve its goal, there hasn't been much reason to celebrate.
Since the merger nearly one year ago, COMS has trended due south (-58.7%). The reasons are varied, but at the core of the stock's underperformance is management's ill-fated decision to take the low road. It was more important to 3Com management that its company be a household name, than it was to build shareholder value. Why else spend millions on a baseball park rather than on new technology. Why pursue dominance of the commoditized consumer/soho (small office/home office) markets rather than expanding your turf in the more lucrative corporate market for switches, routers, etc.
Tough to Leverage Up
This is not to say that COMS doesn't compete on the higher-end, it does. In fact, systems products accounted for 57% of total FY97 revenues. While new products in this area are encouraging, too much of the company's revenues still come from low-margin businesses. A look at the gross margin history of COMS v. CSCO tells the story. Over the past four years, COMS's gross margins have fallen by nearly 10% (mid-50% to mid-40% range). Meanwhile, Cisco's gross margins have remained in the mid-60% area. Unfortunately for 3Com, as competition heats up across the spectrum it will be difficult to reverse the downward trend in margins any time soon. Company's attempts to woo Fortune 500 companies away from Cisco and others will also be difficult, as COMS isn't noted for the direct support such companies demand. Leveraging up is always more difficult than leveraging down.
Inventory Woes Continue
To make matters worse, the company's well-documented inventory problems remain, well, a problem. The merger with US Robotics created an inventory glut of modems which was exacerbated by a delay in the standardization of the new 56k modems. While sales got a lift when
the new standards were reached in February, growth hasn't lived up to market expectations. The weak Asian economies and the growth of competitive markets (cable and dsl) are partly to blame. Time and the its new channel inventory model will eventually right the situation. But it's a lot of time lost in an industry where failure to execute can be deadly.
Sunny Side of the Street
Not all the news at 3Com is bad. For one, the company recently announced that it will hire a new executive to manage day-to-day operations, thereby relieving CEO Benhamou of certain responsibilities. Additionally, the company's inventory problem is closer to its end than its beginning. Finally, much of the bad news is already in the stock price. We know its not a lot to hang your hat on, but it looks like the company may finally be "getting it." Though recent decision to increase advertising expenses to raise brand awareness is a waste of money and a step backwards. Nevertheless, at current levels Briefing sees the additional downside risk as limited
(over the short- to intermediate-term). But until the company's inventory problems are resolved, the product mix improves and management proves that it can execute efficiently, that's about the best that can be said about the stock. Key support is in the 21-20 range, while first resistance is at 30. |
