Turnarounds can be incredibly lucrative for investors who spot the turn before the rest of the market. But that's the rub -- you have to act before the turn is fully visible. With this in mind, Fools interested in a potential turnaround story should keep an eye on 3Com (NASDAQ:COMS).

After years of dwindling sales, the former networking star turned networking dud is finally getting its act together. Last night's quarterly earnings report marked the fifth straight quarter that 3Com has increased its cash balance, which now stands at $1.48 billion (net of all debt).

3Com's current sales and profits paint a bleak picture, but the company has a promising joint venture (JV) underway with Huawei Technologies, one of China's major communications equipment providers. The JV, announced earlier this year, will significantly expand 3Com's line of switches and routers, allowing it to compete more favorably with Cisco (NASDAQ:CSCO). Also, the JV will help 3Com gain entry into markets in China and Japan.

On last night's earnings conference call (which the company was kind enough to include as part of its earnings press release), CEO Bruce Claflin provided an update on the JV's progress to date. Here are some of the highlights:

  • On June 6, Huawei won an important legal victory against Cisco. The court denied Cisco's request for an injunction that would have prevented Huawei from shipping its Virtual Routing Protocol (VRP) network operating system. The court's ruling only required Huawei to remove one module, an apparently non-essential feature that utilized less than 1% of the VRP source code.
  • On June 18, Huawei unveiled its new Switch 7700, the first of several modular switches and routers that will be sourced from the JV over the next several months. The 7700 targets the mid-level market, where it will compete with Cisco's Catalyst 4500 series. Compared to Cisco's product, Claflin claims that the 3Com-Huawei product "will offer competitive features and performance at a better value to customers." Also, 3Com intends to offer its channel partners (i.e., resellers) the opportunity to earn higher margins by selling 3Com-Huawei products vs. comparable Cisco products.
  • The JV is now expected to launch towards the end of 2003, in 3Com's second fiscal quarter. 3Com and Huawei are still awaiting Chinese government approval, but government feedback so far has been "favorable." Claflin expressed confidence that the approval will be granted, but that the timing remained a bit uncertain.

Turning back to 3Com's cash situation, the company expects to only burn modest amounts over the next two quarters while the JV is being finalized. Once the JV is formally approved, 3Com will also be responsible for contributing $160 million in cash to the venture. At that point, 3Com will then own 49% of the JV.

If we back out $20 million in cash burn over each of the next two quarters, plus the $160 million investment, 3Com will likely end the year with something around $1.28 billion in cash. Backing that projected cash balance out of the company's current market cap of $1.74 billion reveals an enterprise value (EV) of only $460 million. That's an EV-to-sales ratio of only 0.5 on 3Com's current base of very depressed sales.

Beyond strict valuation measures, Fools may also want to keep an eye on any insider buying by 3Com execs as a sign that the stock is compelling. While there's been no insider buying yet and while the JV's success is anything but certain, a successful JV would make 3Com's current valuation look awfully cheap.