3Com: The Most Misunderstood 2-Star Tech Stock with a Number at the Beginning of its Name. Ever.
I love... desk. I love... lamp. I love... 3Com stackable switches. Am I just looking at things in my office and saying I love them? I sure am!
Even Brick would agree that 3Com is a confusing company. Is it profitable? Is it, as Bloomberg calls it, a "money-losing networking equipment maker"? What's with the huge difference in GAAP/non-GAAP earnings? What happened after the Bain buyout died? What do they even do nowadays?
Well, let's first take on the easier question: what does 3Com do? For starters, they're involved with network security (via Tipping Point). It's because of this component that CFIUS was able to stop Bain/Huawei from acquiring 3Com earlier in the year, due to the US government's use of Tipping Point software and their worries that Chinese involvement with 3Com would compromise national security. 3Com also provides networking equipment and solutions for businesses. With their recent 100% acquisition of H3C (which was formed as a joint venture between 3Com and Huawei), 3Com not only became a large networking presence in China, but also controls the innovator in "IT over IP" architecture. The aim of 3Com/H3C is to make this IToIP architecture (which provides data, video/surveillance, voice, storage, etc. capabilities over internet protocol coupled with an open source initiative) the standard in business network infrastructure. This infrastructure would enable the convergence of applications and emerging technologies into one network. And of course, such a network would be protected by 3Com's innovative Tipping Point security technology, so your little wireless-webcam "video conference" with nikkithecallgirl will be secure (though probably recorded, stored, and youtubed by your favorite IT guy).
Ok, so 3Com dabbles in nerdiness... how have they been performing? In 1Q08, they lost $7.8M, or 2 cents per share, according to GAAP accounting. However, they gained 8 cents a share on non-GAAP reporting. (And they've been non-GAAP profitable for the past six quarters). What's the difference? Last quarter, they had a $6.1 million deferred tax liability which was a big chunk of the delta. Other industry-standard accounting tweaks (ex: GAAP requires R&D to be expensed, while most tech companies capitalize it) make up the rest. But at the end of the day, did 3Com actually "make money" in 1Q08?
Indeed it did! Net tangible assets almost doubled from 4Q07. And although liabilities nudged up, while PP&E declined (depreciated?) by 10% and intangible assets by 7%, total asset growth led to a gain of $9M in stockholder equity, or .02/share. And all this while $50M was spent on R&D that didn't make it onto the balance sheet, and while 3Com enjoyed $39M in free cash flow. That's a strong quarter for a "money-losing network equipment maker".
So the stock is now priced at around $2.50, and earnings are coming out this afternoon. A Zacks.com analyst used an earnings projection of $0.20, which would equate to a 12.5p/e. That trails a 20p/e for Cisco, and a $0.20 earnings projection isn't allowing room for growth. Guys... only a year and a half ago, this was a $4 dollar stock. And it fell to $2.00 right after Bain pulled out. Higher growth must have been anticipated then back then... I don't get what has changed except 1) they have now established profitability, 2) they had Bain value them at $5.30/share, and 3) they now own 100% of a leader in Chinese IP technology. Those sound like reasons for prices to move UP!
The only thing I can think is that this company is just misunderstood. 3Com bought half of H3C for $882M, so at least somebody in 3com thinks H3C by itself is worth $1.8B. (3Com's market cap is only $1.0B right now). Insiders bought almost one million shares from March 27-April 1. Maybe the whole company has no idea what they're doing and hence these horrible buys? Or maybe they just know something we don't know... or possibly something we used to know and then forgot once the Bain merger bit the dust. I'm willing to bank on the second. And I can't wait til earnings this afternoon.