THE MARKET MIDDAY
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3Com Doesn't Adapt Quickly
Shares of networking company 3Com (Nasdaq: COMS) hit the skids this morning, falling $4 to $27 1/2 after releasing earnings for the quarter ending in May and cautioning investors about sales in the upcoming year. The company's ongoing net income of $0.24 per share during Q4 was up 33% from last year's comparable quarter and a penny above published consensus estimates. While that sounds positive at face value, the underlying fundamentals don't appear quite as strong, a view reinforced by company comments in the conference call (which you can listen to over the Web).
Fiscal Q4 sales were up only 3% over the same quarter last year. Revenues from system products rose 17%, but sales from the client access product line declined 10%. Sales of the higher-growth system products (which include hubs, switches, and routers) finally accounted for a majority of sales, reaching 55% of the top line. Unfortunately, that means that 45% of sales are still derived from client access products, such as network interface cards, modems, and mobile PC cards, where sales are expected to continue falling.
For the upcoming year, 3Com says it expects revenue growth to be below overall industry growth as it fights slowing sales of client access products. More specifically, it expects negative year-over-year comparisons revenue comparisons in the next two quarters with positive growth in the second half of its fiscal year. While gross margin for fiscal 2000 should remain within its long-term target range of 46.5%-48% (it was 46.5% for fiscal 1999), expenses will continue to be higher than its goal of 30%-31.5% of sales (the figure was 37.5% last year).
While 3Com is involved in an industry that has been popular with investors, the company has poorly managed technological transitions for quite a while. Instead of enjoying the success of most industry players, the company has been struggling for over two years to regain a competitive edge. While it does hold extremely promising technology in its PalmPilot, that product line currently accounts for only 10% of sales. Until 3Com is able to profitably grow faster than its industry, investors will probably be best served looking elsewhere for an investment idea.
Shares of portal company Lycos (Nasdaq: LCOS) advanced $3 15/16 to $93 following reports in The Wall Street Journal that Internet investment firm CMGI Inc. (Nasdaq: CMGI) is interested in buying out the 82% of Lycos it doesn't already own -- a possibility discussed at great length earlier this year when CMGI was spurning advances from Lycos buyout hopeful USA Networks (Nasdaq: USAI). For more on CMGI's plans, which may include the purchase of AltaVista and other Internet assets from Compaq Computer (NYSE: CPQ), click here.
Digital telecommunications company Stanford Telecommunications (Nasdaq: STII) plugged in $2 3/8 to $28 7/8 after Canadian network equipment maker Newbridge Networks (Nasdaq: NN) agreed to buy the company in a stock swap that values Stanford at $30 per share, a 13% premium to yesterday's closing price. If Stanford sells off certain assets, Newbridge could add as much as $5 more per share. Newbridge shares fell $1 3/8 to $29 3/8.
Business software consultant and services provider Intraware (Nasdaq: ITRA) grabbed $1 1/4 to $24 after reporting a fiscal Q1 loss of $0.14 before charges, better than last year's $0.50 loss and Wall Street's projected $0.25 loss. The company said sequential quarter membership growth was 43%, while sequential customer account growth was 27%.
Online health and medical information provider Healtheon Corp. (Nasdaq: HLTH), which inked a deal to have portal operator Yahoo! (Nasdaq: YHOO) carry its information in its health area, added $4 3/4 to $87 1/4. Yahoo! users will also have access to Healtheon's medical library health information search tool.
Truckload carrier Swift Transportation Co. (Nasdaq: SWFT) sped up $1 3/8 to $18 1/2 on news that it will replace electronics retailer Best Buy's (NYSE: BBY) spot in the S&P MidCap 400 Index. Best Buy is replacing AirTouch Communications (NYSE: ATI) in the Standard & Poor's 500 Index at the close of trading June 28. AirTouch is being acquired by Vodafone Group Plc (Nasdaq: VODFF).
Meanwhile, network data storage equipment maker Network Appliance (Nasdaq: NTAP) jumped $2 7/8 to $47 11/16. It will replace Ascend Communications (Nasdaq: ASND) in the S&P 500 Index after the close on June 24, as Ascend is being acquired by Lucent Technologies (NYSE: LU). For a complete listing of changes in the S&P indices, click here.
Biopharmaceutical company BioCryst Pharmaceuticals (Nasdaq: BCRX) picked up $1 1/16 to $9 3/16 after receiving a $2 million milestone payment from Ortho-McNeil Pharmaceutical as part of an agreement with Ortho-McNeil and the R.W. Johnson Pharmaceutical Research Institute in connection with the initiation of Phase II clinical testing of an oral treatment for viral influenza.
Internet service provider Internet America (Nasdaq: GEEK) wrapped up $3 9/32 to $20 13/32 after Scott & Stringfellow rated the stock a new "strong buy," setting a 12- to 18-month price target of $24 per share.
Internet service provider EarthLink (Nasdaq: ELNK) rose $5 1/8 to $62 3/8 this morning. The shares picked up $9 5/8 yesterday on rumors that the company may be acquired by PC direct marketer Gateway (NYSE: GTW).
Fiber optic network operator Qwest Communications (Nasdaq: QWST) slipped $2 3/4 to $32 9/16 after increasing its dual bids for Baby Bell US WEST (NYSE: USW) and telecom services provider Frontier Corp. (NYSE: FRO). Qwest is now offering $69 per share in stock for US WEST and $20 per share in cash and $48 per share in stock for Frontier, subject to a collar on Qwest's stock between $30.50 per share and $43.50 per share. Frontier said it will consider the higher bid, and Global Crossing (Nasdaq: GBLX), which has also offered to buy the two companies, said it is also determining what action it will take.
Supermarket operator Albertson's Inc. (NYSE: ABS) dropped $2 5/8 to $51 3/4 after the company reportedly said in a conference call last night that it sees earnings at the low end of current analysts' expectations for fiscal Q3 and Q4 and for fiscal 2000 as well. Yesterday, the company said it reached an agreement with the Federal Trade Commission that will allow it to complete its merger with American Stores (NYSE: ASC), so long as the companies divest 145 stores in California, Nevada, and New Mexico.
Packaging products supplier Crown Cork & Seal Co. (NYSE: CCK) leaked $3 7/16 to $29 after saying weak business conditions in Europe and lower beverage can demand in the U.S. will result in Q2 EPS between $0.75 and $0.77 per share, missing the First Call mean estimate of $0.92. The company said it sees its full-year EPS between $2.20 and $2.25, down from last year's $2.33.
NASCAR souvenirs and die-cast collectibles producer Racing Champions Corp. (Nasdaq: RACN) was run over for a $9 3/8 loss to $7 1/2 after saying competition from Star Wars-related toys and a tough comparison to 1998, when NASCAR marked its 50th anniversary, will result in a $16 million to $20 million shortfall in Q2 sales and a loss of $0.30 to $0.35 per share in the period. The Zacks mean estimate had called for EPS of $0.20. The company also said it will record a $6 million restructuring charge during the quarter related to its acquisition of toymaker The Ertl Co.
Online computer products retailer Cyberian Outpost (Nasdaq: COOL) dropped $1 5/16 to $10 1/16 after posting a fiscal Q1 pro forma loss of $0.38 per share, worse than last year's loss of $0.25 per share but not quite as bad as the loss of $0.40 expected by analysts surveyed by First Call. Both Deutsche Bank Alex. Brown and Dain Rauscher Wessels cut their ratings on the firm to "buy" from "strong buy."
Semiconductor and thin film head production equipment maker FSI International (Nasdaq: FSII) fell $1 1/8 to $7 11/16 after reporting a fiscal Q3 loss of $0.17 per share (excluding a $0.71 per share charge for a valuation reserve), worse than last year's loss of $0.09 per share. The company said its Q4 sales will be flat compared to Q3, adding that it does not expect to return to profitability until Q4 of 2000, at the earliest.
Managed care provider PacifiCare Health Systems (Nasdaq: PHSYB) lost another $2 1/4 to $71 3/4, adding to yesterday's 14% drop, as it tried to rein in some analysts who went overboard with their fiscal 1999 earnings projections after the company posted strong Q1 results last month. PacifiCare is now guiding analysts to expect EPS between $6.20 and $6.31, less enthusiastic than the prior First Call estimate range of $5.95 to $6.55. As recently as six weeks ago, analysts were only expecting EPS of $5.56.
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David Marino-Nachison (TMF Braden), a new Fool