3Com Is Key to H-P's Future

PALO ALTO, Calif. (TheStreet) -- Hewlett-Packard's (HPQ) acquisition of PALM (PALM) may be more exciting to talk about, but it is the computer maker's purchase of 3Com that could spell the biggest upside for investors.

H-P blew past Wall Street's estimates in its second-quarter results last night; the company was boosted by a rapidly-improving economy. H-P also raised its guidance, citing strong PC sales, a rebound in enterprise spending, and -- crucially -- the impact of adding 3Com to its lineup.

H-P's smartphone and tablet plans have come under the microscope following the $1.2 billion Palm deal, overshadowing last year's $2.7 billion 3Com acquisition. The 3Com deal, however, will help H-P challenge networking giant Cicso (CSCO) and widen a major revenue stream.

During a conference call last night, H-P CEO Mark Hurd explained that 3Com helped the company close deals with two Fortune 500 firms during the second quarter. "We've had a very good start with 3Com -- we have been aggressive in hiring," he said, adding that H-P's ProCurve products also enjoyed a "very significant" number of wins during the quarter.

The tech bellwether's results have prompted Goldman Sachs to raise its 2010 H-P earnings estimate from $4.48 to $4.65. For 2011, the analyst firm also raised its forecast from $4.96 to $5.20, thanks largely to 3Com.

"Higher revenue (despite a bigger FX drag) and the inclusion of 3Com are the main drivers to our increased EPS forecast," wrote Goldman David Bailey in a note released on Wednesday.

H-P only closed its 3Com acquisition on April 12, so the networking firm contributed just $50 million to its second-quarter revenue. The company's overall networking business is nonetheless enjoying rapid growth, with sales up 58% year-over-year.

Cisco, however, still holds about 70% of the networking market, according to Goldman Sachs, but H-P's 3Com deal is pushing in the right direction.

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