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For 3Com, It's Time to Deliver

There are no more excuses for




On Tuesday, 3Com emptied its pockets and showed smaller profits than most anyone expected: no silver at all; just two pennies per share.

On Wednesday, Wall Street was in a forgiving mood because the company trimmed expenses and finally flushed inventories, its two chief goals for the quarter. Also, 3Com is shipping 56-kilobit modems that adhere to a new standard and preparing a suite of higher-end products that enhance data networks with phone service. All this allowed the stock to escape the wrath of investors. The shares fell just 1 1/2 to close at 35 5/8 on heavy volume, but were still up for the week.

The potential upside also allowed sell-side analysts to forget about the earnings call they missed, which they insist wasn't the focus anyway, and to look ahead.

Now, however, 3Com must deliver bottom-line results this spring. Since the inventory problem is solved, investors can train their eyes on final sales and profits. CEO Eric Benhamou said as much in a conference call Tuesday evening.

"We have no more hurdles to cross before we enjoy strong operating performance," Benhamou said. Since 3Com's price-to-earnings ratio just jumped to 74, investors might hold him to it.

"They've put their credibility on the line," said one trader. "If these guys blow next quarter, forget about it." He added, "Just run for the hills, because the only people that will buy are short-sellers."

What helps, of course, is that the pros are lowering the bar. They reduced the

First Call

consensus estimate for the May quarter to 20 cents per share from 31 cents. But the average rating remained mildly bullish by midafternoon Wednesday. First Call had been notified of only one downgrade. The research service couldn't say which analyst downgraded, but Scott Heritage at

UBS Securities

cut the stock to hold in a morning research note.

For the third fiscal quarter ended March 1, the networker reported net income of $7.4 million, or 2 cents per share, excluding a pretax credit. That's down from $161.2 million, or 45 cents per share, one year earlier (which excludes a tax credit). Revenue was $1.25 billion, slipping from $1.46 billion in the year-ago period.

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3Com fell more than a dime short of the First Call consensus estimate of 14 cents per share. The pros had disagreed widely about where 3Com would come in, with estimates ranging from a loss of 7 cents per share to earnings of 26 cents per share.

A 3Com spokesman says the company didn't have to warn because the expectations ranged so wildly. Fair enough. Among the networkers, only the reliable


(CSCO) - Get Cisco Systems, Inc. Report

has kept estimates tight and consistent.

What is the post-mortem from the sell-side analysts?

"The profit number was not at all the focus," says Mike Duran of

Lazard Freres

, which hasn't performed underwriting for 3Com. Duran's forecast of 21 cents per share was off target. But Duran says the point is that 3Com met its quarterly goals of sweeping excess products from the channel and trimming expenses. Duran is a little worried that fewer 3Com products sold out of the channel -- $1.37 billion to $1.4 billion, short of his $1.6 billion estimate.

Still, on Wednesday morning, Duran told institutional clients to buy 3Com. He says clients are far more focused on his estimate for calendar 1999, which he's fixed at $2.04 per share. 3Com now trades at 17 times those forecast earnings.

Duran has rated the stock a buy since April, riding it from the 30 range to the high 50s in July, then down to 30 in November.

Duran isn't alone. Eric Blachno, an analyst at

Bear Stearns

, forecast the same earnings and final sales earlier this week as Duran, and he made a bullish call Wednesday morning for reasons similar to those Duran cited. He says 3Com wiped the slate clean.

"If they had a higher EPS number, but still didn't finish the inventory situation, you would have seen the stock fall much further," Blachno said. Bear Stearns has performed no underwriting for 3Com.

Going forward, however, the focus is much more clear, leaving analysts and 3Com less margin for error.