Barrons's talks about big accumulators
Big Buyers Load Up on 3Com's Sagging Stock
By Lisa R. Goldbaum
In Wall Street's jungle, networking-equipment maker 3Com has certainly
started to look more like a lamb than a lion. The stock's meteoric rise from below 5 to nearly 80 by the end of 1996 now seems like a distant memory.
While the stock of its largest competitor, industry leader Cisco Systems, remains strong -- although perhaps not the barnburner it once was, either (see Weekday Trader, "Bellwether No Longer?," February 24, 1998) -- 3Com's shares were pummeled in 1997.
And with good reason. The company completed a $6.5-billion acquisition of modem king U.S. Robotics; faced new competition on the low end from chip-giant Intel, which set off a price war that ravaged 3Com's margins, and got embroiled in an industry battle over standards for 56 kilobit modems. That caused confused consumers to hold off purchases, sticking 3Com with hugeid unsold inventories. Oh yeah, and then there was Asia.
The upshot: 3Com warned analysts early in December that earnings for the third fiscal quarter ended November 30th would be negatively impacted by inventory problems, prompting analysts to lower their estimates for the quarter to a paltry four cents per share from 46 cents. The company did in fact report net income of four cents a share, or $15.1 million, down 87% from a year ago. Not surprisingly, the shares are languishing at about 40% off their 52-week highs, closing Monday at 35 5/8. Many analysts remain wary about the company's prospects.
But with the stock's price in the basement, this looks like the kind of situation a contrarian would love. And indeed, some big investors with substantial firepower are loading up on 3Com's shares, betting that the company can weather its current problems and eventually prevail.
Large asset managers that established big positions in 3Com late last year included Capital Research & Management, which bought 2.7 million shares, and EQSF Advisers, which scooped up nearly 9 million shares, according to Vickers Stock Research. Lincoln Capital Management also purchased over three million shares, and BEA Associates bought over a million shares.
Other firms took the opportunity to raise their existing bets in 3Com. Putnam Investment Management added more than nine million 3Com shares to boost its holdings to more than 12 million, while Fox Asset Management bought well over a million shares in the quarter ended December 31, 1997 (from a mere 7,000 shares before), Vickers data show.
Why have so many of these big players bought in to the 3Com story?
Obviously, the stock looks cheap by some measures. At its current price, it trades at about 19 times First Call's consensus earnings estimate of $1.87 per share for the fiscal year ended May 1998 -- a decided discount to its median projected five-year earnings growth rate of 27%.
Indeed, John Liang, a portfolio manager at Fox Asset, said value was one of the main reasons his firm increased its 3Com stake big time late last year. "As a value manager, you tend to try to get into these things early," he notes, pointing out that the rest of the market has taken a "wait-and-see" attitude toward 3Com.
But Liang also has faith that 3Com will turn itself around soon. He believes management's efforts to slash inventories are on track, and is impressed with 3Com's push to pick up market share despite the greater competition. Indeed, analyst John Duffy at Fahnestock & Co., who recently upgraded his recommendation on 3Com to Buy from Hold, notes that the company managed to increase its share of the market for low-end networking gear by matching Intel's lower prices. Of course, that cut 3Com's margins, but Duffy believes prices have likely bottomed. "Intel hasn't made any moves to continue to be aggressive on pricing," he contends -- one reason he thinks the bad news is already in 3Com's stock price.
And that's not all. Analyst Paul Weinstein at Deutsche Morgan Grenfell, who bucked Wall Street's ho-hum consensus by initiating coverage of 3Com with a Buy recommendation last week, says margins should pick up over the next year as the company enters a major new product cycle that should upgrade some 80% of its product line by the fall, including many of its adapters and switches.
And while 3Com's inventory problems won't disappear overnight, believes the company has gotten over the hump. "They should have almost all of it behind them by this quarter," he declares. And the industry did finally agree on a standard for the 56 kbps modem early last month, which should relieve nervous consumers, boost sales and whittle down that inventory backlog. 3Com officials did not return calls seeking comment by press time.
Should the inventory glut become less of a problem from here on, freeing 3Com to focus on making competitive new products with higher margins, that can eventually translate into stronger earnings -- perhaps even better than Wall Street is anticipating. If that happens, some of the stock's many nervous followers might follow the lead of the big investors who already have become believers, and 3Com stock could roar again. |
