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FOOL PLATE SPECIAL
An Investment Opinion
by Louis Corrigan
3Com: Don't Call It a Comeback
3Com Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %>, the number-two data networking firm, connected for a $4 5/8 gain to $31 3/4 this morning after announcing slightly better-than-expected earnings for its fiscal fourth quarter and a ten million share stock buyback. The company produced $1.375 billion in sales in the quarter, up only slightly from the year-ago period but up 10% sequentially. Excluding one-time items, 3Com earned $65.9 million, or $0.18 a share, beating the consensus estimate by a penny. For the year, the networker recorded $5.4 billion in sales, down from $5.6 in FY97. Pro forma results excluding one-time items showed net income of $246.1 million, or $0.67 a share. That compared to $543.2 million, or $1.54 per share, in FY97 based on pro forma results. After trading as high as $81 a share in December 1996, 3Com shares plunged following its spring '97 acquisition of modem-maker U.S. Robotics and the serious inventory problems that ensued. However, Chair/CEO Eric Benhamou said yesterday that the company "turned the corner" in the fourth quarter and is now enjoying operating efficiencies.
The quarter did show significant improvements in sales and marketing expenses, which dropped 7.5% in dollar amounts year over year, and in general and administrative expenses, also down 17.4%. But gross margins still fell to 43.5% from 45.8% in the year-ago period, though they were up slightly from the third quarter. One problem is that fierce price competition and slow modem sales caused a 6% year-over-year drop in revenues in its remote access business, which makes up 51% of 3Com's sales overall. The 56k modems have yet to catch on, and Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> has pressured prices in the network interface card (NIC) market. Network system sales of switches, hubs, routers, and network management software did increase 8% from a year ago and 22% sequentially. However, the company is simply getting beaten by networking gorilla Cisco <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> in the local area switch market. Research outfit Dataquest recently reported that 3Com's share of this market fell from 16.3% last year to 13.9% in the first quarter of '98, while Cisco's share expanded from 30% to 43%.
Indeed, 3Com only managed to beat estimates because analysts had recently lowered them following fears that sent the stock down to $23 in early June. Part of the trouble is that both Cisco and Bay Networks <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAY)") else Response.Write("(NYSE: BAY)") end if %> (to be acquired by Northern Telecom) have also been cutting prices on network systems products. Yet after virtually stopping consumer product shipments over the past six months, 3Com's inventory held by distributors is down, though inventories in-house have actually increased from a year ago. Plus, many are expecting the 56k modems to catch on with consumers over the next few quarters. Still, CFO Chris Paisley said in the conference call that first quarter sales would be a "challenge." And the company is still refining its operations, reducing its workforce by 6% in the fourth quarter.
The real question for investors is whether 3Com can continue to compete in a business where both data and voice network equipment providers are positioning themselves for a converged future. With over 50% of 3Com's business in increasingly commoditized remote access products and much of its carrier market depending on partnerships with other vendors, some observers see significant challenges ahead.
Luxury retailer Saks Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SKS)") else Response.Write("(NYSE: SKS)") end if %> jumped $3 3/16 to $28 after saying it hired Goldman Sachs and Merrill Lynch to explore "strategic alternatives," including a possible sale of the company. The firm is currently controlled by private Bahrain-based investment firm Investcorp International.
Internet software and "portal" firm Netscape Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %> gained $2 3/16 to $28 1/8 after Brown Brothers Harriman started coverage of the company with a "near-term neutral" rating and a 12-month price target of $33 per share.
Swedish telecommunications equipment maker Ericsson <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ERICY)") else Response.Write("(Nasdaq: ERICY)") end if %> climbed $1 to $28 15/16 after signing a $100 million contract with Egypt's MISRFONE to develop and roll out a GSM 900 wireless communications network in that country. The company also signed a $26.5 million deal to supply Brazilian long-distance carrier Embratel with network management products.
Chemicals and plastics company Union Carbide Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UK)") else Response.Write("(NYSE: UK)") end if %> moved up $2 3/8 to $50 3/8 after Credit Suisse First Boston raised its rating to "buy" from "hold."
Bear Stearns upgraded Radio Shack parent Tandy Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TAN)") else Response.Write("(NYSE: TAN)") end if %> to "attractive" from "neutral," sending the firm's shares up $2 3/8 to $53 9/16.
Cranberry grower, processor, and marketer Northland Cranberries <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CBRYA)") else Response.Write("(Nasdaq: CBRYA)") end if %> gained $5/8 to $14 15/16 after selling 5 million shares in a public offering at a price of $14 per share, generating roughly $65.3 million in proceeds.
Internet service provider MindSpring Enterprises <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSPG)") else Response.Write("(Nasdaq: MSPG)") end if %> picked up $13 7/16 to $94 after setting a three-for-one stock split, payable July 24.
Utility and anti-virus software developer Symantec Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SYMC)") else Response.Write("(Nasdaq: SYMC)") end if %> was lifted $5/8 to $25 5/8 after announcing it has integrated IBM's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> virus detection technology into the latest version of its Norton AntiVirus software, following its development partnership with Big Blue announced last month. Also, the company said it has purchased the assets of New Zealand's Binary Research Ltd., which developed the Ghost disk cloning technology, for $27.5 million.
Bandwidth management tools and PC adapter cards developer Adaptec <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADPT)") else Response.Write("(Nasdaq: ADPT)") end if %> tacked on $7/8 to $16 1/2 after calling off an agreement with Hyundai Electronics America to buy the company's Symbios server adapter products unit for $775 million. The company said it was concerned that the deal would not be approved by the Federal Trade Commission.
Several stocks continued to move higher this morning following yesterday's deal between AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> and TCI <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TCOMA)") else Response.Write("(Nasdaq: TCOMA)") end if %>. Cable-based Internet service provider At Home Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATHM)") else Response.Write("(Nasdaq: ATHM)") end if %>, of which TCI holds a 39.1% stake, climbed $5/16 to $51 1/2. TCI Ventures Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TCIVA)") else Response.Write("(Nasdaq: TCIVA)") end if %> gained $15/16 to $19 15/16, while fellow TCI tracking stock Liberty Media Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LBTYA)") else Response.Write("(Nasdaq: LBTYA)") end if %> was lifted $1 11/16 to $39 7/8.
Troubled consumer appliances maker Sunbeam Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SOC)") else Response.Write("(NYSE: SOC)") end if %> plunged $1 5/8 to $10 3/8 after announcing that it is delaying its SEC filing for its previously issued Zero Coupon Convertible Senior Subordinated Debentures due 2018 in order to continue its review of its 1997 financial statements. Because of its previously announced anticipated second quarter loss, the company also said that it is continuing talks with bank lenders to avoid non-compliance of certain measurements in its credit agreements.
Pharmaceutical company Amgen <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMGN)") else Response.Write("(Nasdaq: AMGN)") end if %> gave back $1 3/4 to $65 as analysts talked down rumors that the company may be acquired by Johnson & Johnson <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JNJ)") else Response.Write("(NYSE: JNJ)") end if %>. Amgen gained yesterday on takeover rumors and an analyst upgrade to "strong buy."
Home furnishings retailer Bed Bath & Beyond <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BBBY)") else Response.Write("(Nasdaq: BBBY)") end if %> sank $5 7/8 to $50 3/8 after reporting fiscal first quarter earnings of $0.18 per share compared with $0.14 for the prior-year period and in line with analysts' estimates. The company also announced a 2-for-1 stock split.
Lone Star Steakhouse & Saloon <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: STAR)") else Response.Write("(Nasdaq: STAR)") end if %> fell $1/8 to $13 13/16 after reporting second quarter earnings of $0.17 per share, down from $0.44 for the same year-ago period. Q2 comparable store sales declined 11.2%. In May, the company announced it would suspend future development activities for its Lone Star Steakhouse restaurants, citing continued negative same-store sales and lower average unit volumes.
Property and casualty insurance holding company W.R. Berkley Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BKLY)") else Response.Write("(Nasdaq: BKLY)") end if %> tanked for a $5 1/8 loss to $40 1/4 after warning it expects Q2 earnings will be about 10% lower than those of the year-earlier period due to storms and intense ongoing price competition.
Diversified industrial machinery and specialty components manufacturer Dover Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DOV)") else Response.Write("(NYSE: DOV)") end if %> took a $2 1/2 dive to $33 13/16 after announcing that it expects Q2 EPS will be about flat with last year's $0.44 a share. Dover CEO Thomas Reese said that although the company still expects record earnings this year, its earlier hope of another year of double-digit EPS growth "now looks a bit aggressive."
Meat processor Thorn Apple Valley <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TAVI)") else Response.Write("(Nasdaq: TAVI)") end if %> was chopped up, losing $1 1/4 to $10 7/8 after announcing plans to exit the fresh pork business and focus on its processed meats business. The company said its fiscal 1996 and 1997 losses resulted mainly from its fresh pork operations. The company will take a fiscal Q4 charge of $35-$50 million.
Performance Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PTIX)") else Response.Write("(Nasdaq: PTIX)") end if %>, which makes communications, networking and data storage interface systems products, dropped $1 to $10 1/2 after announcing that it anticipates Q2 revenues to be 15% to 20% less than Q1 revenue of $7.4 million and that it predicts lower-than-expected Q2 earnings as a result of a delay in the awarding of a follow-on defense contract. Had the contract, which involves the retrofitting and updating of fault-tolerant network systems, been awarded before today in the amount expected, the company said it would have met expectations for the quarter.
Diversified energy holding company MCN Energy Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MCN)") else Response.Write("(NYSE: MCN)") end if %> plummeted $5 5/8 to $25 1/2 after warning that it expects an after-tax Q2 charge of up to $225 million mainly due to the impact of low oil and gas prices on its exploration and production business as well as the underperformance of certain exploration properties. It now expects 1998 EPS will be 10%-15% below last year's $1.91 and 1999 EPS to recover to a range of at least $2 to $2.10. The company plans to exit the exploratory part of its business to focus on lower risk areas.
Outsourcing and consulting firm CDI Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CDI)") else Response.Write("(NYSE: CDI)") end if %> lost $1 11/16 to $27 15/16 after announcing that it anticipates Q2 EPS will be between $0.45 and $0.46, including an $0.08 restructuring charge, down from $0.60 for the year-earlier period. The company said it has experienced lower-than-expected demand for its technical and information technology services.
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Contributing Writers Yi-Hsin Chang (TMF Puck), a Fool Brian Graney (TMF Panic), Fool Two Alex Schay (TMF Nexus6), Fool, too Dale Wettlaufer (TMF Ralegh), Final Fool
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