Bad news for COMS is good news for ASND (see bold)
Dow Jones Newswires -- May 22, 1998
3Com Shares Continue To Slip Amid Vacuum Of Info
By Joelle Tessler
NEW YORK (Dow Jones)--Amid a vacuum of guidance from the company, shares of 3Com Corp. (COMS) have slipped over the past two weeks, leaving analysts with a wide range of opinions on how business is going for the maker of networking equipment.
3Com's shares, which hit a new 52-week low Friday, have been falling since company officials met with analysts at the Networld + InterOp networking conference in Las Vegas two weeks ago.
Although 3Com executives have given Wall Street little official guidance, several analysts came away from these meetings concerned that gross margins will remain under pressure in the near term, sales of the company's new standards-based V.90 modems are not picking up as quickly as expected and inventory levels are still inflated.
Still, a number of analysts maintain that 3Com's four key operations - network interface cards, or NICs; modems; systems products; and remote access products - are doing well and that the company should be able to overcome the recent bumps in its business during the next six months.
But with 3Com declining to say much to Wall Street, there is a sense of "overall concern and nervousness" surrounding the shares, acknowledged Lazard Freres & Co. analyst Michael Duran.
"In a vacuum, people get nervous," said Duran, who believes that the fundamentals of 3Com's business are nevertheless quite solid.
The hazy outlook for the company has resulted in a very wide range of earnings estimates.
First Call Research Director Chuck Hill said the numbers from the 32 analysts providing estimates for the company's fiscal fourth quarter, which ends this month, run from 8 cents a share all the way up to 24 cents; the average is 18 cents. In the year-earlier quarter, the company earned 12 cents a share.
The average estimate for fiscal 1998 is 69 cents a share, based on 32 analysts' estimates ranging from 60 cents to 78 cents, Hill said. Fiscal 1997 earnings were $1.41.
And the average estimate for fiscal 1999 is $1.45 a share, Hill said, but the estimates from 30 analysts range from $1.01 to $1.70.
3Com's shares, which were trading around 35 in early May, fell as low as 27 3/8 earlier Friday, past the previous 52-week low of 28 5/16, set Thursday. The stock recently stood at 27 3/4, down 5/8, or 2.2%, on Nasdaq volume of 4.3 million shares, compared with a daily average of 7 million.
According to one analyst, Wall Street's concerns about 3Com center on several key points.
First, analysts worry that the company's gross margins may not improve over the near term because of weak sales of systems products - which include Ethernet switches and modem systems - and continuing adjustments to inventory levels.
Looking to bring down bloated inventories, 3Com slowed shipments into the distribution channel earlier in the year, resulting in disappointing operating earnings for the fiscal third quarter: 2 cents a share, compared with 50 cents a year earlier. The company also put in place a new model that calls for lower inventory levels.
One analyst said margins could also be hurt by networking companies' increased selling of adapter cards and modems directly to PC manufacturers for installation in their machines before shipping, since the original equipment manufacturers can extract purchasing discounts.
Second, analysts are concerned that 3Com is facing distribution-channel inventory problems with its Total Control remote-access products. One analyst also raised the possibility that 3Com could lose some business in this product line as some of its customers merge with Internet service providers and carriers that use different suppliers.
For instance, he said, the network operations of America Online Inc. (AOL) and CompuServe, which bought equipment from 3Com, were recently acquired by WorldCom Inc. (WCOM) - whose UUNet Technologies division, which operates a large piece of the Internet backbone, buys products from Ascend Communications Inc. (ASND). Likewise, while Sprint Corp. (FON) uses 3Com as a supplier, Earthlink Network Inc. (ELNK) - the ISP that in which it recently took a 30% stake - buys from Ascend.
In addition, several analysts said it appears that sales of 3Com's new v.90 modems are not picking up as quickly as expected this quarter. Wall Street has had high hopes for sales of the modems, which are based on the new 56K standard, since many consumers had held off purchases until the standard was adopted.
Adams Harkness Hill analyst Peter Lieu said 3Com is looking for sequential growth from the $1.25 billion in revenue it reported in its fiscal third quarter, although it doesn't yet know if it will achieve this, since the quarter appears to be back-end loaded. |
