Zacks.com Announces That Bill Martin and Matt Ragas Highlight: 3Com.

CHICAGO -- If you're looking to put money into this tech stock you may want to do a little homework before making any moves. Find out the story on 3Com and whether this is a good time to buy. Click here for the full story exclusively on Zacks.com: http://at.zacks.com/?id=84

Here are the highlights from the Featured Expert column:

3Com was one of the high tech darlings, and Bill Martin and Matt Ragas, editors of Find Profit, still hold some. However, are the days for this stock numbered? After hitting a 52-week low and announcing some disappointing numbers, one might think so. But the company has a couple of things going for it and much of the bad news has been accounted for in the current price. If you own this stock or are looking to buy some, you must read this expert commentary before making any moves.

3Com`s Q1 Results: Joint Venture Shines, Core Business Still Struggling- September 20, 2004

After the bell, networking gearmaker 3Com (Nasdaq:COMS) announced fiscal first quarter (ended August 27, 2004) results and provided guidance for the current quarter.

COMS` Q1 revenue totaled $162.0 million, at the middle of lowered guidance the company provided a week ago, and slightly higher than Wall Street`s lowered estimates. Sequentially, revenue fell about -11% and was up slightly from a year ago. COMS` net loss totaled ($36.0 million), or (9 cents) per share, compared to -$106 million, or -29 cents per share a year ago, and a (5 cents) per share net loss last quarter.

The bulk of COMS` revenue, $147 million, came from the sale of enterprise networking products, with connectivity products making up the remaining sales. Geographically, revenues declined in every region on a sequential basis. Yes, this wasn`t a good quarter.

Operating expenses for the period checked in at $97 million (including -$3 million in restructuring costs), down -41% year-over-year as the company has significantly tightened up its cost structure. COMS used -$42 million in cash for operations during the period, with $10 million going for royalty payments that are made on an annual basis and $8 million for restructuring payments. Backing these payments out, the core cash usages looks to have been around -$24 million for the period.

COMS continues to sport a cash rich balance sheet, ending the period with $1.26 billion in cash ($3.25 a share) and no debt. The firm repurchased 15 million shares of its stock at a cost of $73 million in Q1 (how low would the stock have fallen if COMS wasn`t in the market last quarter?). This is the first time COMS had been in the market buying back its stock in many quarters. COMS ended the period with 388 million shares outstanding.

Looking ahead, COMS EVP and CFO Don Halsted said the company expects fiscal Q2 revenues from desktop, mobile and server connectivity products to decline sequentially between -20% and -25%, and to be offset by continued growth in enterprise networking products, where revenue is expected to grow 10% to 15%. As such, COMS said revenue in fiscal Q2 should total $170 million to $180 million, gross margins will remain flat at 38% and operating expenses should remain in the mid-$90 million range.

As one might expect after the recent COMS earnings warning bombshell, this was the most sober and downbeat call that the company has held since we`ve owned the stock. We appreciate that COMS CEO Bruce Claflin is direct and doesn`t pull punches, but it doesn`t change the fact of how tough a road ahead COMS still has in its core business, something Claflin readily acknowledged.

When I step back and look at the stock today, I see two primary assets for COMS; 1) its big, but declining cash backstop, and, 2) its 49% stake in the fast growing JV with Huawei. On the downside, COMS` restructuring on the expense side looks to be largely completed and the business is still burning cash, albeit at a much lower level. There are also signs that competition in the small and mid size enterprise market could be heating up for the company.

The stock looks stuck to me in a risk-reward ``no man`s land`` right now. Down at the $4 level, and given the miserable summer COMS shares have already had, the market has already priced a ton of bad news into the stock. Nothing COMS management said last night about the challenges ahead were surprising. The downside to the stock from here still looks limited, given the name`s fat cash backstop (of course it is declining), and 49% stake (with an option to take majority control and consolidate the JV`s results into its financials) in the promising Huawei JV, which is now on a $250 million revenue run rate.

Taking a different view, the ``easy`` cost cutting and restructuring by COMS looks largely done and the initial excitement over the Huawei deal has worn off. It`s still a question mark if COMS will be able to consistently drive the top line growth it needs to get the biz to a sustained cash flow positive state. COMS could surprise the market with an acceleration in Huawei JV sourced product sales and/or meaningful new channel partner wins in the next quarter or two, which given the lower expectations, could spark the stock. That said, while the stock still looks cheap using almost any metrics, and would look more appropriately priced at the $6 level, the near term catalysts for the stock are murky.

Bottomline, we would not be putting fresh money to work in COMS at this level, but we also don`t see the need to blow out of the stock at this price, either. For now, we plan to continue to hold our COMS shares as it heads into the seasonally strongest time of the year for tech spending. We think we`ll have the opportunity to sell the stock at higher prices. If our view on how we plan to play COMS changes, we`ll of course let you know.

Despite a better-than-expected fiscal Q4, shares of COMS took a beating during the summer swoon, compounded by a series of exec departures, hitting a 52-week low of $4.00 a month ago before attracting some buyers. The stock correctly discounted COMS` recent warning.

Read Bill Martin and Matt Ragas' complete commentary, along with more defensive plays for an uncertain market, by clicking: http://at.zacks.com/?id=85

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