The WAN Connection

3Com Corporation

3Com's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %> valuation is reminiscent of how investors used to value PC makers and still values disk drive makers. In other words, investors still give 3Com the lowball valuation treatment even with a five-year track record of growing earnings per share at annual rates of 60% and creating annual shareholder return of 65%.

While 3Com is one of two companies in the Focus Group that is not a pure play in the WAN equipment sector, its advancement in the WAN sector will determine the success of the company. This is where the margins lie, at the top of the product margin hierarchy. At the bottom of that hierarchy, you find modems and network interface cards followed by LAN systems.

The investment case for 3Com doesn't stem totally from its hot new products and whiz-bang technology. In this case, the investment merit of the company lies in its valuation as the cheapest company in the group while its prospects are far from the most uncertain. That is always a great formula for investors looking for growth through earnings growth and P/E multiple expansion.

The Financials

3Com recently reported a 10.4% increase in pro-forma first quarter operating income. While that trailed a much stronger advance in revenues, the company is still absorbing its recent acquisition U.S. Robotics. An 11.6% year-over-year rise in pro-forma EPS stands a good chance of expanding in the coming quarters and thus perking up analysts' expectations for future growth. The company has just under $2 billion in working capital, down from last year's pro-forma balance sheet, but still strong at about 10% of its market cap.

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