3Com Reports
Tuesday, March 24, 1998
by Jeff Fischer (JeffF@fool.com)

ALEXANDRIA, VA (March 24, 1998) -- The Fool topped the strong market, rising 1.4% as the S&P gained 0.9% and the Nasdaq jumped over 1% -- despite another decline in Intel (Nasdaq: INTC).

Tomorrow Intel's brother of sorts might be 3Com.

3Com (Nasdaq: COMS) announced third quarter results after the market closed, with the stock halted at $37 1/4. The number-two networking giant reported earnings of four cents per share, well below estimates of fourteen cents. The earnings were actually two cents per share after accounting for a merger credit. This column will present about two cents worth of thought on the news. (By the way, that's a link to the company's press release for your Foolish perusal.)

3Com's revenue rose 4% from the previous quarter to $1.25 billion, but gross margins declined to 43% from the 50% perch achieved last year. Declining prices in the low-end networking market forces 3Com to cut prices, too, in order to maintain market share -- which the company leads by a long shot. But it's not entirely great to be a market share leader without having pricing power, too.

Sales of high-end products, like switches and hubs and platforms, declined from $621 million to $549 million in the last quarter, adding to lower margins. Sales of network interface cards and modems jumped, rising from $598 million to $700 million -- but margins on these products aren't nearly as high.

3Com claims that its inventory issues have been resolved and now the plan going forward is to, again, focus primarily on marketing. The company offers promising new products after working to increase its product depth, and is thought to be entering a new product cycle. So as dismal as the current fiscal year has been for 3Com, next year at least has the potential to improve substantially. Let's hope. This stock hasn't gone anywhere at all -- it's flat -- since early 1995. Ouch! That especially hurts having happened during a record strong stock market and during the initial growth years of the Internet.

What are our thoughts now about holding 3Com?

We're always looking for new investments that we believe offer more potential than our current holdings, but we're also, as David reiterated yesterday, long-term investors who rarely trade. If a sell is merited it will be made when we believe that we've found something better in which to invest the money. That said, right now we have no plans for selling 3Com. The quarterly report and the conference call need to be looked over and discussed with a long-term frame of mind before anything else. If anything, though, I personally would like to consider selling it and replacing it with Cisco Systems (Nasdaq: CSCO), the industry leader, if we want to remain in one networking stock for the next five years or longer, as I think that we do.

Paul Motter (TMF DotCom) will write this column on Friday. Paul hosts the Fool's networking industry message board and he'll share his thoughts on 3Com here, so let's not beat this horse too much right now. It's not moving anywhere.

The playback number for 3Com's conference call is (303) 642-1751. It's available until about 7:00 pm tomorrow, Wednesday.

3Dfx (Nasdaq: TDFX) reported that it dominated retail sales of 3D-only graphics accelerator cards last year. According to a study by PC Data, 3Dfx earned 87% of the U.S. market share in the relevant retail sales, making it 6.7 times larger than its nearest competitor. 3Dfx also reported that its new Voodoo2 chipset was the fastest product of 20 competing cards tested by Mercury Research.

Next up: Today I spoke with Mr. Douglas Keller, the CFO of Innovex (Nasdaq: INVX), whose stock rose with industry stocks even after Quantum (Nasdaq: QNTM) preannounced a weaker-than-expected quarter. Innovex has guided analysts down for its recent quarter, too. The company now expects earnings of about $0.27 per share compared to the previous estimate of $0.41 per share. Due to its high margins and lower capital expenses, Innovex is able to remain profitable during slowdowns, but there is nothing that it can do about weak orders.

The company has produced about seven million lead-wire units per week over the last quarter, down from around nine million in the prior quarter. Visibility going forward has not yet improved. There are several factors involved, including the ongoing disk drive inventory correction and the changing business models at leading PC manufacturers. Mirroring Dell (Nasdaq: DELL), companies like Compaq Computer (NYSE: CPQ) are working towards a just-in-time inventory approach, "rather than build PCs beforehand and then watch them become obsolete on the shelves," as Mr. Keller stated.

At these "depressed" prices, Innovex trades at "only" 12 to 15 times the new, much lower potential earnings for 1998. As always, though, analysts are projecting as well as possible, but will likely be wrong again one way or another -- they might be a bit high -- or low.

Finally, this past week and for the next several weeks Dale Wettlaufer (TMF Ralegh) is discussing how to value financial stocks in the Drip Port columns. Eventually he'll be assessing over fifteen banking and financial services companies in search for an investment. Give the introductory columns (beginning last Monday) a read if you're interested. See you on the message boards!

Fool on!

--Jeff

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TODAY'S NUMBERS

Stock Change Bid ---------------- AMZN - 3/16 83.63 AOL +1 7/8 67.88 T +1 9/16 67.50 DD +1 1/16 69.81 DJT + 3/16 9.63 XON + 3/8 68.38 INVX +1 13/16 23.00 IP - 1/2 49.13 IOM + 1/16 7.38 KLAC - 7/16 36.94 LU - 5/8 123.13 COMS +2 3/16 37.25 TDFX - 5/16 27.75 SPY + 15/16 110.56
Day Month Year History FOOL +1.38% 6.24% 12.55% 277.72% S&P: +0.92% 5.37% 13.93% 141.20% NASDAQ: +1.11% 2.37% 15.42% 151.66% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 67.88 1766.53% 5/17/95 1960 Iomega Cor 1.28 7.38 475.99% 10/1/96 42 LucentTech 47.62 123.13 158.58% 9/9/97 290 Amazon.com 38.22 83.63 118.79% 8/12/96 130 AT&T 39.58 67.50 70.55% 2/20/98 215 DuPont 59.83 69.81 16.68% 1/8/98 115 S&P Depos. 95.91 110.56 15.28% 1/8/98 425 3Dfx 25.67 27.75 8.11% 2/20/98 200 Exxon 64.09 68.38 6.69% 2/20/98 270 Int'l Pape 47.69 49.13 3.01% 4/30/97 -1170*Trump* 8.47 9.63 -13.65% 6/26/97 325 Innovex 27.71 23.00 -17.00% 8/24/95 130 KLA-Tencor 44.71 36.94 -17.39% 8/13/96 250 3Com Corp. 46.86 37.25 -20.51% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 48191.25 $45609.38 9/9/97 290 Amazon.com 11084.24 24251.25 $13167.01 5/17/95 1960 Iomega Cor 2509.60 14455.00 $11945.40 8/12/96 130 AT&T 5145.11 8775.00 $3629.89 10/1/96 42 LucentTech 1999.88 5171.25 $3171.37 2/20/98 215 DuPont 12864.25 15009.69 $2145.44 1/8/98 115 S&P Depos. 11029.25 12714.69 $1685.44 1/8/98 425 3Dfx 10908.63 11793.75 $885.13 2/20/98 200 Exxon 12818.00 13675.00 $857.00 2/20/98 270 Int'l Pape 12876.75 13263.75 $387.00 8/24/95 130 KLA-Tencor 5812.49 4801.88 -$1010.62 4/30/97 -1170*Trump* -9908.50 -11261.25 -$1352.75 6/26/97 325 Innovex 9005.62 7475.00 -$1530.62 8/13/96 250 3Com Corp. 11715.99 9312.50 -$2403.49 CASH $11233.54 TOTAL $188862.29

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