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Huawei 3Com LogoGood discussion on Huawei-3COM in this weeks Barron’s.

If you’re hot to get in on the Chinese Telecom/Datacom hardware trend, 3COM (COMS) is your best vehicle. I wonder how Huawei-3COM has approached accounting issues

Fred Hickey, editor of “The High-Tech Strategist Newsletter” gives a summary of the case for owning 3COM.

Hickey: My last long is a tech name. It’s pretty hard these days to find value stocks in tech. 3Com is a highly speculative long, a turnaround story. The company has lost out to networking-industry gorilla Cisco in recent years. It was as high as $25 a share in 2000, and it’s now $4. Revenues have stabilized after declining for some time. The company has had four consecutive quarters of sequential revenue growth. The last was 22%, year over year. Again, they make routers and switches, just as Cisco does. They have a strong Voice-over-Internet Protocol [VoIP] product line, which is a hot category. They sell security products, due to the recent acquisition of TippingPoint. Their connectivity-product line has depressed overall results, and is nearly gone. 3Com has a $1.56 billion market cap, and $754 million in cash. The enterprise value is around $800 million, or about one times sales. The company burned through $28 million of cash in the latest quarter, but that’s been improving. At this price it is intriguing, especially when you consider the hidden jewel.

The hidden jewel?

Hickey: A few years ago 3Com set up a joint venture with Huawei, the largest networking company in China. Huawei-3Com is growing rapidly, and it’s causing Cisco great grief. Cisco talks about the Chinese threat in every conference call. The joint venture has grown to a run rate of $500 million in sales, based on the last quarter and the current one. It has had four sequential quarters of double-digit revenue growth. There are 3,400 employees at this joint venture. Half are Chinese engineers, at an estimated cost of one-fifth of 3Com’s engineering talent in the U.S. 3Com owns 49% of the company, with an option to buy another 2%. That option has just come up, and Huawei has approved it. If 3Com buys it, it gains controlling interest. It is awaiting approval by the local Chinese authorities as well as Beijing. Once it buys the 2%, all these fast-growing revenues start showing up on its P&L [profit and loss statement].

Is the joint venture profitable?

Hickey: It’s near breakeven, and in the current quarter 3Com expects it to be profitable. It has an estimated 20% share of the networking market in China. 3Com can leverage the cost savings by selling products at significantly lower prices than Cisco. 3Com has the potential to be a massive winner or a bust, but for now there’s a lot of cash and no debt.

No big surprise, there was a big move in COMS stock a few weeks back.

[Hat Tip to The Stalwart]


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