SKIP....JUST REALIZED THAT THIS IS AN OLD REPORT
from "The BayWatcher"...I was wondering why their price
forecast was low, hope they've changed that.
>> Chatfield Dean & Co. Inc. Upgrades Rating on 3Com Corp. to a STRONG BUY Recommendation.
biz.yahoo.com <<
Here's the report:
(I haven't read it yet, timing is suspicious, but then
again....maybe he wants stock price to go up; also, imo,
seems like his 12-18 month price estimate of $48 is conservative,
but I think this is just proper protocol for recommendations)
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CHATFIELD DEAN & CO.
July Focus Equity Recommendations
Chatfield Dean's Computer Networking Industry Recommendation
3COM CORPORATION
NMS/COMS/$26.00 (6/23/98) - Risk Rating: Growth With Risk
Chatfield Dean does not make a market in this security.
3Com Corporation (NASDAQ: COMS) provides individuals, groups, and organizations of every size the capability to
communicate and share information and resources. The Company is one of the world's leading designers and manufacturers of
communications and network connectivity equipment and has more than 100 million customers worldwide. 3Com's revenues
of over $6 billion are composed of a diverse global client base consisting of large enterprises, network service providers,
carriers, small businesses and individual consumers. The Company employs over 13,000 people in more than 45 countries.
3Com is comprised of three main units, each extremely well positioned in its respective market. The Enterprise Systems
division develops hardware "hubs", or computer network control devices, network switches, routers and management software.
The Carrier Systems division designs large-enterprise and public carrier communications networks, and the Client Access
group produces products that enhance cross-desktop connectivity for offices and industry. These three divisions combined with
the recently merged modem producer, U.S. Robotics, deliver broad-based and comprehensive computer network and
communications solutions to a wide spectrum of end users.
3Com's strength lies in its diversified product base and cutting-edge technological systems. The Company is taking full
advantage of the explosive growth in network communications occurring within firms of every size. Large industries with
demands for local area network (LAN) and wide area network (WAN) connectivity can use 3Com technology. Smaller firms
seeking entree to the Internet can partner with 3Com to implement high-speed ISDN remote access products. In addition,
small-office and telecommuter customers can benefit from 3Com's commitment to innovative and convenient products.
3Com's Palm Pilot hand-held organizers dominate the market with a 60% market share of total sales in personal
microcomputing. Finally, personal computer users enjoy Internet connectivity via the U.S. Robotics brand of modems, one of
the most recognized names in desktop computing. We believe that 3Com's proven ability to successfully penetrate each of these
markets will continue to produce excellent opportunity for the Company and its shareholders.
Significant recent product developments and strategic alliances have poised 3Com for further growth and increased
profitability. Last month, the Company announced its partnership with Oracle Corporation to develop connectivity solutions
between 3Com's Palm Pilot and Palm III personal organizers and Oracle's database software. This connectivity will allow
3Com to expand its corporate market for hand-held devices. In addition, Oracle and 3Com will co-develop application
software for the Palm products, which will generate new third-party software to run on the machines. 3Com has also signed an
alliance agreement with Hewlett-Packard Company which will offer server systems pre-configured with a 3Com network
interface card already installed. A recent agreement with Newbridge Networks will enhance the breadth of their alliance with
3Com and provide interoperability among several product categories. Newbridge and 3Com will work together to enhance the
development and production of end-to-end managed networks that will support data, video, and voice applications. These
applications will be interoperable with preexisting networks in the asymmetrical digital subscriber line (ADSL) market.
Further, 3Com has entered into collaboration with global telephone equipment provider, Siemens, to supply it with integrated
voice/data products. All of these cooperative arrangements bode well for future business growth.
3Com's financial position is superior, though not without concerns. Current assets outweigh current liabilities by more than
two and a half-to-one. However, 4Q'98 (ended May 31) sales are expected to be approximately $1.35 billion which would
represent a 1.5% decrease over the same period last year. Consensus estimates are that quarterly earnings per share will reach
$0.16 in 4Q'98. This is $0.14 higher than the previous quarter but $0.31 less than 4Q'97. Although a $0.16 EPS represents a
decrease in expected EPS from previous consensus estimates, we believe 3Com's earnings potential has stabilized from earlier
disappointing results. 3Com's poor earnings year-to-date are due to several factors: The Asian economic crisis cut exports into
this technology-rich market; 3Com's merger with U.S. Robotics left the Company with swelling modem inventories (this
problem was fueled by the technology switch to 56k modems and the debate over which transmission standard would be
accepted industry-wide); competition from an ever-increasing array of modem, network and communications vendors has
lowered prices and margins; and intense price competition in the personal modem market has reduced 3Com market share.
3Q'98 sales in the Client Access division were down 16% from the same period last year, and sales in both the Systems
divisions were down 12.5 % over the same period.
Despite these concerns, 3Com is making progress toward improving this year's results. Inventory channeling has been
improved and new distribution mechanisms have reduced overstocking. We believe that domestic inventory problems are in
their final stages. Although the pricing environment in almost all of 3Com's product segments will continue to be very
aggressive, price competition may be lessened somewhat by the Company's ability to innovate and deliver products others
cannot. Strategic alliances with various communications providers have also produced improvements across broad product
categories. The Asian economic situation may prove to be more difficult to resolve, but is showing some preliminary signs of
stabilization. In addition, 3Com has new products in the pipeline in every industry segment in which it specializes. Given these
concerns and opportunities, we believe 3Com will show some improvement in fiscal 1Q'99 (ending August 31). For FY'99, we
predict an EPS of $1.20 with a projected 12-month share price target of $48, and a P/E multiple of 40X. Therefore, we feel an
investment in the shares of 3Com at current price levels has good upside potential. In addition, continued interest in 3Com's
product line and market penetration in the networking and communications industries have made the Company an attractive
target for takeover. In recent days, the share price has strengthened with the news of buyout negotiations. Based upon the above
considerations, we recommend an investment in COMS shares with a BUY rating for the portfolios of risk-tolerant, growth
oriented investors.
SELECTED RISK FACTORS
There can be no assurance that 3Com's merger with U.S. Robotics will prove profitable. Competition in the network and data
communications industries is fierce, with over 35 companies vying for identical markets. Competitors include behemoths
Microsoft and IBM, in addition to well-established network specialists like Cisco Systems (NMS: CSCO) and Ascend
Communications, Inc. (NMS: ASND). Especially competitive is the personal modem market where price cutting and
uncertainty about technological standards has quelled demand. Continued uncertainty regarding the Asian economy has stalled
orders overseas and has dampened 3Com export earnings. Inventories in this important market are still swollen, with relief not
expected until August of this year.
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