3Com: Back on Sale

| About: 3Com Corporation (COMS)

After hitting a high of $2.85 this week, 3Com (COMS) pulled back over 20%, mostly on Cisco (NASDAQ:CSCO)-related pessimism. But, 3Com sees no slowing on its earnings and cash flow. In fact, 3Com has beat analyst estimates the last 4 consecutive quarters by an average of 95%! Cisco trades at 11.5 times forward P/E, while 3Com only trades at 5.7 times forward P/E. Per Vectorvest, the forecast growth rate on 3Com is 25% while Cisco is only 3%. Thus, in terms of valuation, 3Com represents a tremendous value within the sector.

3Com is a leading global provider of enterprise and small-business networking solutions. From its 2007 acquisition of 100 percent ownership of H3C Technologies Co., Limited (H3C), 3Com today has a leading market presence in China, and a significant networking market share in Europe, Asia, and the Americas .

3Com's current price of $2.23 is under its book value by 16.8%. Earlier this year several analysts mistakenly downgraded 3Com, citing that the cash per share, a previous support for the stock, had dropped to low levels (reference: istockanalyst 3/27/2008 citing $0.44 / share). But, 3Com's management has performed exceptionally well, topping revenue estimates, improving margins, and increasing cash per share to $1.33 per share, which is 3 times the Spring, 2008 level. Thus, 3Com is trading at less than 2 times cash and 0.7 times sales, which makes it a potential takeover target by rivals Cisco, Verizon (NYSE:VZ), or AT&T (NYSE:T).

On September 24, 2008, 3Com's Board approved a $100 million share buyback program. At the time the stock was trading at $2.25 per share. The buyback program announced was more than 10% of the outstanding stock. Thus, just on this news, the stock value would increase to $2.48 per share, or 10% above the level at that time. Furthermore, over the past 6 months, institutions have acquired another 10% of the float, upping there share to 77% of the total float. Notably, Silverpoint Capital added a 5.6% stake or 20 million shares. Thus, between institutions and the company's share buyback, there is only about 13% of the float that remains. Considering that 17 million shares are short, I expect a major short squeeze in the near-future.

Although the stock is up over 10% since I wrote about it in late-July, I believe that there is much more upside to come. During the same time period from July 24 through November, the S&P is down over 25%. Regardless, it is still clear that the market has failed to price in the positive developments in 3Com over the past several months. In addition to the share buyback program, if one factors in the expected settlement from Bain for the merger termination and the recent news of the product alliance with Microsoft (NASDAQ:MSFT), it is quite apparent that 3Com is extremely under-valued at current levels.

Downside is quite limited considering the cash position and the coming share buyback. 3Com has had 4 consecutive down-days, and is due for a nice bounce off the 50-day moving average level. I expect that 3Com shareholders will attain a lot of alpha over the coming couple weeks as the stock bounces to the $2.70-$2.90 level.