3Com is soaring again
Network supplier 3Com is finally regaining altitude, after taking on the
staggering U.S. Robotics modem business in 1997. 3Com's momentum
stalled with that $7 billion merger, as it worked down Robotics'
surprisingly large inventories. At their nadir, shares in Santa Clara,
California-based 3Com sank to 23 bucks, from a pre-merger peak of
$80.
That's when Barron's looked at the upside (see "The Future Is 3Com,"
December 1, 1997). Happily, 3Com's sales climbed a gratifying 29% to
$1.5 billion in the quarter ended November 1998, with earnings of $133
million, or 36 cents a share.
With his stock at $46 last week, 3Com CEO Eric Benhamou met with
analysts in New York to describe his company's "big, hairy, audacious
goals" for the future.
By 2003, 3Com and its telecom partner Siemens could gain $1 billion in
new sales from gear that carries voice traffic over computer networks.
Even sooner, the market for networked disc drives known as Storage
Area Networks (SANs) could bring another billion dollars to all vendors,
and 3Com is the first big networking vendor with ready products.
3Com has survived a price assault by Intel in networking cards, in part by
cutting that business to less than 10% of overall sales. Deals with PC
makers like Dell, Hewlett-Packard and IBM have also secured 3Com's
market share.
The US Robotics modem business is
preparing for higher speeds. TCI
gave Robotics a master contract for
cable Internet gear, and Dell will
offer Robotics modems for a fast
phone line technology called DSL.
While placing its products inside PCs
like Dell's, 3Com plans to keep its
brand name in the consumer's face to
avoid the anonymity that put
disc-drive makers at the PC vendors'
mercy.
Benhamou aims to raise 3Com's operating profit margins from the low
teens to the high teens by trimming costs. Over $100 million in savings
could come from shrinking inventories. A year ago, the cycle time for
3Com to buy raw materials and get paid for its finished goods was 111
days. By the end of the May 1999 fiscal year, Benhamou wants that cycle
down to 65 days.
The chief executive seemed proudest of how 3Com's business now
stretches from the heart of computer networks to the palms of people's
hands (where 3Com's Palm Computing devices are earning a profit), while
dodging powerful rivals. Despite Intel's designs on the networking market,
Microsoft has chosen 3Com as its network partner and put 3Com
technology into Windows 2000. And 3Com won't chase Cisco Systems
into the core public phone markets, where Cisco is battling Lucent
Technologies and Northern Telecom.
Although the quarter that ends in February is always a seasonal challenge,
NationsBanc Montgomery analyst Al Tobia thinks 3Com shares could
ultimately reach $60. He forecasts earnings of $1.40 a share for the May
'99 fiscal year and $2.25 for the year ending May 2000.
--Bill Alpert |
