Needham comments and projection on 3com as posted at Trading-Ideas.com....
trading-ideas.com
February 11, 1999
Needham & Co issued a strong buy rating on 3Com after the stock fell sharply on concern that the company might not meet March quarter's earnings estimate. Needham believes that such concern is unwarranted and the stock provides an excellent buying opportunity. They said that the concern stems from the fact that management has not provided proper guidance to the investment community as to how the quarter is shaping up. Management indicated that the quarter is back end loaded, which means that most of the bookings would take place towards the end of the month. Needham indicated that 3Com beat consensus estimate in each of the past two quarters by a large margin. While 3Com may not beat current quarter earnings estimate of $0.35, they have no basis to lower estimates either. They like the stock, which is trading at less than two times its FY1999 sales, and free cash flow this year could reach $800 million. They expect sales to grow by 15%-20% next year based on improving operating margin. Gross margin is likely to decline somewhat due to competition from Intel's network interface cards (NIC's), as 3Com lowered prices by 5.5%-15%, but still remains almost 10%-15% above Intel's. There are further concerns that Cisco is taking market share away in SOHO, Small Office, Home Office market. Rumors suggests that Cisco is expanding its distribution channel, however, Needham points out that 3Com took many years to establish its relationship with its distributors and Cisco is not likely to change that in a year. Thus, Needham believes that such concern is unwarranted. Weak results from Tech Data and Ingram Micro might have contributed to some of the heightened concern as 70% of 3Com's businesses go through distributors such as Tech Data and Ingram Micro. Needham believes that 3Com might be going through some minor turbulence, but the company remains solid with revenues approaching $6 billion and is the second largest networking company. They believe that 3Com would overcome the obstacles and could trade up to $66 within the next 12-months. |
