For more than three years running, networking equipment maker 3Com (NASDAQ:COMS) has consistently bested Wall Street's consensus earnings estimates -- yet it hasn't earned a profit in any quarter over the whole stretch. Last quarter, the firm managed to break even; might tomorrow's fiscal Q2 2007 report finally put 3Com in the black?

What analysts say:

  • Buy, sell, or waffle? Eight analysts still follow 3Com -- one less than last quarter. One says buy, one advises selling, and six more recommend holding.
  • Revenues. On average, they expect sales to shoot up 71% to $314.6 million ...
  • Earnings. ... and for these sales to yield another quarter of breakeven earnings.

What management says:
The big news this quarter was 3Com's announcement that it's bought itself a new wholly owned subsidiary. As previously mentioned, the company had already bought a big enough interest in its "H3C" joint venture with China's Huawei to give it a "controlling interest" -- and the right to consolidate H3C's results with its own. Last month, 3Com went one step further, bidding against Huawei for the right to buy its partner out, winning the bidding, and agreeing to pay $882 million for Huawei's share of H3C for the privilege. Why? "H3C has proven to be a well-established, stand-alone business with substantial market share in China and strong potential to expand globally," 3Com CEO Edgar Masri said.

What management does:
With no small thanks due to H3C, 3Com has grown its gross margins, and decreased the negativity of its operating and net margins, over the course of the last year.

Margins %




























All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
With no offense to Mr. Masri, and no disparagement to his optimism intended, I have to admit that my interest in 3Com has never centered on its "strong potential to expand globally." Instead, I've always been attracted to the company's rock-solid balance sheet and its corporate treasury brimming with cash. I thought 3Com might be a Green Gene stock, and could remain so if it could just keep itself from burning too much cash, too fast.

Tomorrow's news, therefore, will probably mark the end of my serious interest in the stock. With $822 million pledged to Huawei, 3Com is virtually guaranteed to report a balance sheet either entirely drained of cash, or about to be so (depending on when, exactly, it needs to ante up to Huawei.) But you never know -- the company might report that it's turned free cash flow-positive at the very moment it most needs to. So in addition to checking the damage to the balance sheet, I'll be sure to take a glance at the cash flow statement as well, on the off chance that things have turned around.


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How'd we do at calling 3Com's last quarterly earnings news? You be the judge:

McAfee was a former Motley Fool Stock Advisor pick. To discover Tom and David Gardner's full list of stellar stock selections, try our flagship investing newsletter service free for 30 days.

Fool contributor Rich Smith does not own shares of any company named above.