3Com Bull's Pen
by Paul Larson ([email protected]@aol.com)

3Com is the second-largest company in the growing computer networking industry, trailing only the mighty Cisco <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %>. If one believes the networking industry is going to continue to grow (and who doesn't), it is hard to ignore 3Com as a compelling value. With a commendable resume, a beautiful balance sheet, and an extensive product line in a hyper-growth industry, 3Com is a company poised for continued expansion in the future.

Without going into detail that only networking techno-wizards can understand, the company has numerous products that dominate the "edge" of the computer network. 3Com has the leading or close to leading market share in modems, network interface cards, switches, concentrators, routers, and hubs. I can't even begin to describe the networking product line in this limited format, but I can recommend a stroll to http://www.3com.com/products/index.html for more information on the company's extensive offerings.

Also in 3Com's portfolio is the most successful handheld computer to date. The company's PalmPilot has been a raging success, with sales surpassing a million units -- and growing. While the product is a small portion of the company as a whole, it provides some revenue diversity as well as some exciting future opportunities for integrating networking products into the mobile realm.

3Com has an absolutely beautiful balance sheet. The company is essentially debt-free and has about a billion dollars in cash and investments. Can you say, "Cash King?" Both 3Com and its recently acquired subsidiary U.S. Robotics did not earn this cash by being slackers. Their impressive bank statements are a testament to the combined company's past success and management effectiveness. Furthermore, a billion bucks is a lot of green-stuff with which to enhance shareholder value either through further acquisitions or share buybacks. Whatever 3Com decides to do with this cash, having such a war chest should serve the company and its shareholders well going forward.

The recent income statements are not nearly as spotless as they have been in the past, but a large portion of the recent earnings weakness is due to charges related to the recent U.S. Robotics merger. The most notable of these burdens has been a drastic reduction in inventory levels, a transient effect that has just about played out. It should also be noted that the non-cash charges related to the merger were much higher than the actual expenses shown on the income statement. Many charges were taken to reduce redundant corporate overhead expenses significantly. The benefits seen from the combination should start to be felt in the next few quarters.

Even though this has been a tough fiscal year for 3Com, gross margins are still quite healthy in the mid-40% range. Finally having a 56K modem standard that 3Com customers can easily upgrade to with a simple software patch should boost sales of the 56K modem product line. Many consumers have been confused about the conflicting standards in this product cycle. Now that the confusion is quickly evaporating, the company can again leverage the powerful U.S. Robotics brand name in the consumer modem market. Consumers buying 56K modems will, naturally, want 56K Internet access. This should also help drive sales of Internet access hardware in which, of course, 3Com has the leading market share.

The company also has numerous technologies and products in development that are quite exciting, including broadband technologies such as xDSL and cable modems. These products will mean faster and faster Internet access, something that is and will be in awesome demand for the foreseeable future. It's tough to say exactly what technologies our computers will be using to communicate with each other five years from now, but it is a rather safe bet that 3Com will be there offering a product to meet the need.

Wall Street is quite myopic, and there is little argument that 3Com's recent earnings have been nothing to brag about. Nevertheless, take a look forward and the company's future looks bright. If you believe that linked computers and appliances are the wave of the future, 3Com is a company on the leading edge that deserves attention, especially at these discounted prices.

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