Businesses dish out big money to maintain their computer and telephone networks, and equipment and solution provider 3Com (NASDAQ:COMS) has been trying to position itself to benefit. Unfortunately, despite well-intended efforts, the company still lacks the crucial metric that makes buying equity in an enterprise worthwhile: profit.
To recap, here are the reported losses from 2002 through fiscal 2005: $596 million, $284 million, $349 million, and $196 million. While they're getting smaller, they're still substantial. And there's no guarantee that management can ever bring the company back to profitability.
In its report for the fourth quarter, which ended June 3, you don't have to look far down the fiscal 2005 income statement to see where the company starts bleeding red. Gross profit came in at 36% of sales, or $234.3 million, and the next line down shows sales and marketing expenses of $243.7 million. Wow. That means 3Com had to fund the remaining operating expenses from cash on hand. I already pointed out the ongoing losses above, but this company requires a serious turnaround. Expenses have to come down drastically, and the company needs to gain ground on industry competitors. In short, 3Com has to sell more products at higher prices and spend less to do it. It won't be easy.
The competition is no slouch, either. Cisco (NASDAQ:CSCO), the industry giant, generated more than $4 billion in profit during fiscal 2004 and grew third-quarter 2005 revenues by 10% compared with its previous Q3. There's a long list of other profitable enterprises to worry about as well, like Hewlett-Packard (NYSE:HPQ), Avaya (NYSE:AV), and Lucent (NYSE:LU). While revenue growth is slow throughout the industry, 3Com's recent results are still below par. Fourth-quarter revenues were down 3.7% year over year, and full-year revenues were down 6.8% compared with the previous year.
Without a clear path to future profitability, 3Com seems very risky at the current price. Mr. Market has the shares valued at $1.35 billion, or about 1.06 times book value. This may seem cheap, but every year the company operates at a loss, cash is lost, and the book value drops. In 2000, thanks to boom-time profits, the company had over $3 billion in cash and equivalents. Today that number is $844 million. If the company's operations don't liven up soon, the downside could be substantial. Go ahead and root for management to pull off this turnaround. Just don't put your money where your mouth is.
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Fool contributor Matt Thurmond has no financial interest in any company mentioned in this article, meaning he doesn't own stock and isn't shorting shares.
