Vive la 3Com

3Com (Nasdaq: COMS  ) is invading Europe.

Wednesday, the maker of data and voice networking equipment reported that it beat second-quarter 2004 estimates with a 12% sequential increase in revenue, due mostly to strong results in its European operations. But losses widened to $0.37 per share from $0.19 in the same quarter a year ago.

Europe accounted for 48% of the firm's $182 million in revenue during the second quarter, easily outdistancing the 33% contribution from the Americas. Sales were down 11% in the U.S. and Latin America during the same period.

Management cited seasonal strength in Europe and weakness in the Americas as the reason for the heavy overseas influence on sales, but the trend is too powerful to ignore: Europe has outpaced the Americas in revenue contributions for three of the past four quarters. If 3Com is to forge a turnaround in its tête-à-tête with chief rival Cisco Systems (Nasdaq: CSCO  ) the battle appears likely to be won offshore.

CEO Bruce Claflin waxed optimistic on the possibilities during last night's earnings conference call, citing strong European channels and better brand awareness than competitors in the region.

Claflin and Chief Financial Officer Mark Slaven also pointed to 3Com's newly approved joint venture with Chinese router and switch maker Huawei as a source of future growth.

Indeed, Huawei gives 3Com leverage by allowing it to reduce costs and expand its product line for larger businesses. The strategy involves providing customers with what Claflin characterized as a converged networking infrastructure that includes products for high-speed data transfer, voice calling over the Internet, wireless connectivity, and network security.

While aggressive, the plan doesn't promise a fast payoff. Executives wouldn't comment on when 3Com will turn a profit, choosing to hold off on further guidance until its analyst conference in New York on January 8.

3Com hasn't posted a quarterly profit since fiscal 2000, due to shrinking margins for low-end connectivity products such as PC modems as well as increasing competition from Cisco and smaller players such as Juniper Networks (Nasdaq: JNPR  ) and Extreme Networks (Nasdaq: EXTR  ) .

Time will tell if 3Com's overseas push proves to be the pièce de résistance in its effort to return to profitability. In the meantime, the firm has nearly $1.4 billion in the bank to assist with the transition.

This last point is particularly important for the value investor. Closing yesterday at $7.70, 3Com stock traded for barely more than two times its $3.70 in net cash per share. For those math phobes like myself, I reached that number by subtracting other long-term obligations from cash and short-term investments on the balance sheet and dividing by the total number of shares on the income statement:

$1,392.356 million - 5.002 million = $1,387.354

$1,387.354 million / 375.332 million shares = $3.696 a share (rounded to $3.70)

Buying a piece of ongoing operations for $4 per share could be a steal if a recovery is under way.

Bonne chance!

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Tim Beyers doesn't own shares of 3Com or any of the other companies mentioned. He welcomes your feedback at tbeyers@earthlink.net.


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