HOW DID IT FIND TROUBLE?
It is rare when we feature a company in this space that has little substantive news to account for its stock recently being chopped in half, yet that appears to be the case today. Xircom (Nasdaq: XIRC), best known for making modems for laptop computers, has seen its shares fall through the floor on very little news.
Perhaps the shares are down in sympathy with weak earnings predictions from 3Com (Nasdaq: COMS), Xircom's primary competitor. Or maybe it was rumors of an outright buyout from Intel (Nasdaq: INTC), which proved to be false, that caused spurned traders to rush the exits. It could possibly be that investors are taking their cue from Xircom's recent insider selling and playing follow the leader. Any combination of these events may be behind Xircom's slide, or it just may be a case of Wall Street having an acute bipolar attack.
Either way, Xircom's shares reached as high as $46 1/4 on the last trading day of January only to be pushed as low as $15 3/4 in early April. While the stock has recovered a tad recently, Xircom's shareholders probably still feel a bit disconnected.
Based outside of Los Angeles, Xircom is one of the leaders in providing communications equipment for the mobile computing market. The company's primary products are modems and network adapters for use in laptop computers. Semiconductor gorilla Intel owns roughly 16% of Xircom's shares.
Xircom is a member of the S&P 600 SmallCap Index.
Income Statement 12-month sales: $353.1 million 12-month income: $33.2 million 12-month EPS: $1.34 Profit Margin: 9.4% Market Cap: $592 million Balance Sheet Cash: $117.2 million Current Assets: $182.5 million Total Assets: $218.2 million Current Liabilities: $55.1 million Long-term Debt: None Total Liabilities: $64.2 million Ratios Price-to-earnings: 17.3 Price-to-sales: 1.7
HOW COULD YOU HAVE SEEN IT COMING?
Since there has been little substantive news behind Xircom's descent, catching this Trouble before it happened would have been difficult. Nevertheless, there were some signs that shareholders should have noted.
Probably the most prominent sign was significant insider selling. While insider selling should rarely be a "sell" signal in isolation, the breadth and magnitude of it at Xircom should have raised some concerns for shareholders. Watching numerous insiders aggressively bailing could have been a clue that perhaps the future wasn't as bright as some were predicting.
The history of the networking business in general and Xircom in particular over the past three years may have been in the back some investors' minds. The networking industry has gone through bouts of nasty cyclicality and drastic price-cutting. Just ask anyone who has been watching 3Com, Xircom, or any of the other major networkers. Xircom shareholders also saw strong growth and profits in 1994 and 1996, followed by shrinking sales and negative earnings in 1995 and again in 1997. Even though earnings have been largely positive in the last several quarters, with five straight quarters of sequential improvement, Wall Street is obviously looking forward and taking the news with a grain of salt.
WHERE TO FROM HERE ?
The good news for Xircom shareholders is that there appears to be a solid floor under the stock. With almost $5 per share in cash and essentially no debt, the company has more than enough liquidity to make it past any rough time in the near future. The company may even be tempted to use its excess cash to buy some of its shares back. That may provide a short-term boost to the stock.
Intel also recently increased its stake in Xircom. While some traders may be disappointed that Intel didn't swallow the entire company, having Intel as a partner and shareholder can't hurt. This association may also prove especially interesting since Intel is focusing more and more of its attention and resources on the networking industry.
That said, the products Xircom sells -- modems and network adapters -- continue to see prices fall. While the company may arguably have the "best-in-class" products for connecting laptop computers, the actual product line is comparatively narrow. Plus, traditional modems have essentially hit their maximum speed over plain telephone lines at 56K, and it is unclear what role Xircom will play in selling products for broadband applications.
Nevertheless, with a P/E ratio in the middle teens, earnings that have recently bested analysts' expectations, sufficient liquidity, and a partnership with Intel, there are some attractive attributes to Xircom at these levels. The checkered history and uncertain forward outlook may scare some investors away, but the stock is trading at a relatively inexpensive level. For those willing to look past the blemishes, there may just be some value for investors.
-- Paul Larson (TMFParlay@aol.com)
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