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Technology Stocks : 3Com Corporation (COMS) -- Ignore unavailable to you. Want to Upgrade?

To: SpecialK who wrote (12000)	12/9/1997 7:01:00 PM
From: Mang Cheng	Read Replies (1) \| Respond to of 45548

Just bumped into this one by Tim Luke ...... from Lehman, it's real pain to format for posting, notice that the estimate for this qtr is 2 cents : ********************************************************************* Headline: 3Com: Preannounces 2Q97 Sales, Inventories Cut, Rating & Ests Lowered Author: Tim Luke 1(212)526-4993 Rating: 3 Company: COMS Country: SEO CUS Industry: TELECM Ticker : COMS Rank(Prev): 2-Outperform Rank(Curr): 3-Neutral Price : $35 5/16 52wk Range: $81-24 Price Target: $ Today's Date : 12/03/97 Fiscal Year : MAY ------------------------------------------------------------------------------ EPS 1997 1998 1999 - - QTR. Actual Prev. Curr. Prev. Curr. Prev. Curr. 1st: 0.43A 0.48A 0.48A - -E - -E - - 2nd: 0.50A 0.50E 0.02E - -E - -E - - 3rd: 0.43A 0.59E 0.18E - -E - -E - - 4th: 0.45A 0.68E 0.32E - -E - -E - - ------------------------------------------------------------------------------ Year:$ 1.81A $ 2.25E $ 1.00E $ 3.00E $ 1.95E $ - $ - Street Est.: $ 2.33E $ 2.31E $ 3.04E $ 3.03E $ - - $ - - ------------------------------------------------------------------------------ Price (As of 12/1): $38 3/8 Revenue (1997): 5.6 Bil. Return On Equity (97): 32.3 % Proj. 5yr EPS Grth: 20-25.0 % Shares Outstanding: 361.1 Mil. Dividend Yield: N/A Mkt Capitalization: 13.86 Bil. P/E 1998; 1999 : 35 X; 18 X Current Book Value: $6.39 /sh Convertible: YES Debt-to-Capital: 6.2 % Disclosure(s): C ------------------------------------------------------------------------------ * Post close yesterday, 3Com Corp preannounced revenues for 2Q98 in a range of approx $1.22-$1.24 Billion Vs our estimate of $1.70 billion & $1.42 Bill in 2Q96. 3Com expects 2Q97 earnings to show a slight profit versus our estimate of $0.51. * 3Com stated lower revenues reflect efforts to reduce channel inventories across all businesses by an average of 3-5 weeks, with each week of estimated at $100-115 million in sales. In addition, 3Com experienced weakness in modems & sales to Asia. * While channel inventory reduction initiatives may prove long term positive, believe sales out of the channel were roughly flat Vs 1Q98 sales at around $1.6 Bill Vs our est of a 7% increase. 3Com aims to cut inventories by another 2 weeks in 3Q98. * 3Com plans to review full details on 2Q98 results during a conference call on December 18th, 1997. On a preliminary basis, we are reducing our estimates to $1.00 and $1.95 respectively for FY98 and FY99 from $2.25 and $3.00. * Expect shares to open sharply lower. Move to Neutral rating since uncertainties remain regarding impact of more inventory cuts, delays in 56kbps modem standard, outlook for Asian sales & adapters & pricing issues for lower end Systems. ------------------------------------------------------------------------------ Initiatives To Reduce Channel Inventory Levels, Expect More Cuts In 3Q98 In preannouncing substantially lower than expected revenues 3Com stated that the shortfall largely reflects management's initiatives to reduce channel inventories across all three key business units of systems, adapters and modems. Management stated that it had succeeded in cutting inventories in the channel on an average of 3-5 weeks with each week of reduction estimated to be worth $100-115 million. With inventories for Systems and Adapters remaining above management's target levels, we believe that further reductions in a range of approximately $200 million may continue to impact 3Q98 sales levels. Below we detail management's new model for inventory levels. Old Target Level Current Level New Target Level Adapters 6 to 10 Weeks 5 Weeks 4 to 6 weeks Modems 8 to 12 Weeks 10 Weeks 6 to 8 weeks Systems 8 to 12 Weeks 9 Weeks 5 to 7 weeks Weak Sales Of 56kbps Modems, Slower Asian Sales We believe that excluding the impact of inventory reductions, sales out of the channel may have been broadly flat to up approximately 3% in 2Q98 versus our expectations that they might increase in a range of around 7%. As highlighted in earlier notes, weak sales of the new 56kbps modems may have impacted overall modem sales. During the conference call management confirmed that in the absence of an industry standard for the new 56 kbps modems, as much as 2/3 of modem shipments remain the older generation 34 kbps product. Management also stated that weak demand in Asia which had previously been 3Com's fastest growing region at around 10-15% of total sales also negatively impacted sales growth. Outlook: Uncertainty Looking Forward Into Febuary Quarter And Beyond; Rating Lowered In reviewing our investment rating with respect to 3Com, we are assuming a more cautious position near term to reflect our view that a number of the issues that have impacted 2Q98 may continue to contribute to uncertainty going forward. In particular, we note that 3Com plans to seek further reductions in inventory levels by a level of approximately $200 million in the February quarter with the channel expected to reach equilibrium in 4Q98. We are, therefore, looking for a modest uptick in sales to a level of approximately $1.4 Billion in this seasonally challenging quarter. It also appears increasingly likely that the formal approval of the 56kbps standard may be delayed beyond our target date of the January meeting of the ITU. We consider that this delay in the approval of the new standard could add some further uncertainty to the growth rate in USR's overall modem sales. In addition, we believe that the swing in the contribution to 3Com's sales from Asia which had been registering dramatic growth and is now seeing flat to slightly negative quarterly comparisons could also impact our revised estimates. While we continue to admire 3Com's positioning as the dominant player in the adapter card market where the company continues to expand its share, we are adopting a more cautious position with respect to a more uncertain outlook for overall revenue growth in this market. We note that several recent market forecasts for 1997 and 1998 including estimates published recently by consulting firm Instat appear to highlight revenue growth impacted by pricing issues with increases considerably below the mid-to-higher teen unit growth levels (or in-line with PC growth) targeted by 3Com. We note, however, that the introduction of new Fast Ethernet ASICs which begin shipping this month may help improve momentum in this area. In the Systems area, management commented that it had experienced some incremental pricing pressure in lower end systems as well as in the Remote Access Concentrator market. While we continue to believe that a stream of new products including the new 3500 layer 3 switch may positively impact systems sales, we will continue to monitor pricing at the lower end of the systems markets. Cisco's increased focus on the small and medium sized enterprise and the build up of its indirect sales channels could lead to further competitive pressures in this market. During the conference call management confirmed that it currently believes the networking Systems market may be growing at the lower end of a revised industry growth range of 20-40%. This reduction from prior industry growth rate ranges which have been cited in a range of 30-50% is likely to negatively impact investor perception of the networking group with only Cisco demonstrating a clear record of growing at rates of at least 30%. Estimates Reduced While 3Com plans to review full details on 2Q98 results during a conference call on December 18th, 1997, we have introduced our preliminary revised estimates for fiscal 1998 and 1999. We look FY98 revenues to increase a modest 3% to $5.8 billion in FY98 from $5.6 billion in FY97 before advancing to around $7 billion in FY99. We anticipate a reduction in gross margins to approximately 44% in 2Q98 from 48% in 1Q98 with the company likely to delay regaining margins at around the 1Q98 levels until 1Q99. We look for operating expenses to be tightly controlled for the balance of FY98 after moving higher to around $530 million in 2Q98 from $506 million in 1Q98. We have reduced our estimates to $1.00 and $1.95 respectively for FY98 and FY99 from $2.25 and $3.00. Strong Longer Term Positioning We will continue to monitor 3Com's progress in reducing inventory levels and regaining its sales momentum since we believe the combined entity of 3Com and USRobotics remains strongly positioned across a broad range of Local and Wide Area Networking markets with a leadership position at the edge of the network and a growing presence at the core. 3Com's strength across such a full portfolio of core networking technologies, its positioning as a large scale low cost producer and its leadership in channel distribution with truly global reach should position the company as a longer term leader in the networking arena. BUSINESS DESCRIPTION: 3Com is a leading vendor of adapters, smart hubs, communications servers, and internetworking devices. Its products address the rapidly growing LAN market and support multivendor enterprise networks. lehman.com //End//