3Com Corp (COMS)

I've made a good amount swing-trading this thing with real money since Bain pulled out and the market beat it down to under $2.00. I mean, it was 3.50 BEFORE Bain came in, and has been hitting non-GAAP profitability since, so I just feel the company is extremely misunderstood.


Maybe it's the "non-GAAP" profitability that's got people worried. What are they hiding?!?! Well, a big chunk of the difference is the treatment of R&D--per GAAP, R&D must be expensed, instead of capitalized. (I had to ask my accountant co-worker about that one). There's a bunch of other little things here and there that ultimately explain the full 10 cent delta between last quarter's $0.08 non-GAAP profit and the -$0.02 or so GAAP reporting. I was happy enough with the answers when I dug into it to believe that the $0.08 was a good number.


So let's play with the numbers, back of the envelope style: Share price is ~$2.50. Last quarter's income was $0.08. Let's say that the next three quarters they can manage half of that, or $0.04/quarter. So that's $0.20 in annual earnings. $2.50/$0.20 = 12.5P/E... not bad for a tech stock hooking up internet and telephone networks in a market like China with all its cute second-tier cities and high rate of urbanization. Of course, it's second to Cisco, which boasts a POWERFUL dominance in the market. But Cisco commands a P/E >20, so should second place really be that far behind? (BTW, Zacks.com agrees with the 20 cents projection, so I'm not completely pulling it out of my posterior... or am I?)


Looking past the numbers: COMS looks like they're turning around. They're non-GAAP profitable. They spend so much on R&D that they might even come out with a cure for cancer (wait, has that been done already?). Management has purchased on the inside. A new China-based CEO has been appointed. This company is going places, with or without a buyout.