3Com Corp.: Undervalued by Half

3Com (COMS) is a drastically undervalued and oversold stock that should be trading 50% higher than its current price of just $1.97 a share. The company has a healthy $1.25 per share in cash and the stock trades below its book value of $2.49. The forward price to earnings ratio is less than 9, yet the estimated earnings growth rate is estimated to be approximately 33% YOY. These figures have been based on analyst estimates.

Although the company has issued guidance on the lower end of the analysts' range for FY09, it would not be surprising if the actual numbers significantly exceed expectations. The company has beaten analyst estimates the past four quarters by a minimum of 50% each quarter, because management has been quite conservative on its guidance and provided near- flawless execution on its strategies.

It should be noted that 3Com was just awarded $70MM to resolve a patent dispute earlier this month, which is almost 10% of its current market cap of 790MM, and this has not been factored into the stock price. Another great sign is that insiders bought 960,000 shares in the range of $2.23 to $2.34 a share. Also, Goldman Sachs increased its holdings significantly.

As most investors know, Bain Capital Partners LLC tried to buy 3Com for $2.2 billion or $5.30 cash per share, but the offer was withdrawn due to objections from the Committee on Foreign Investment in the United States [CFIUS]. 3Com's Tipping Point business unit supplies sensitive monitoring equipment to US Government's Defense Department. Although the market has discounted the possibility, 3com is still very mush so a potential takeover candidate. I believe that there are many potential suitors, such as Cisco (CSCO), Verizon (VZ), or AT&T (T).

I expect investors and traders to be rewarded by long positions in this company, especially in this range. The stock should easily see $3.00 on future earnings growth, and potentially see north of $4.00 on any takeover talks. Fasten your seat-belts and stay plugged in.

Disclosure: Long COMS

Comments

[ChiCav13:]

Completely agree -- the company has done a nice job to position itself overseas (especially China)... they are going to own China like Cisco owns the US.

Long COMS

2008 Jul 24 10:45 AM

[Randy Fay:]

Remember, the market can stay irrational longer than you can stay solvent. Funny 3com is mentioned as perhaps the most textbook case of irrational pricing.
On March 2, 2000, 3Com sold 5 percent of its stake in Palm to the public through an IPO for Palm. Pending IRS approval, 3Com planned to spin off its remaining shares of Palm to 3Com's shareholders before the end of the year. 3Com shareholders would receive about 1.5 shares of Palm for every share of 3Com that they owned, thus the price of 3Com should have been 1.5 times that of Palm. Investors could therefore buy shares of Palm directly or by buying shares embedded within shares of 3Com. Given 3Com's other profitable business assets, it was expected that 3Com's price would also be well above 1.5 times that of Palm.

The day before the Palm IPO, the price of 3Com closed at $104.13 per share. After the first day of trading, Palm closed at $95.06 per share, implying that the price of 3Com should have jumped to at least $145. Instead, 3Com fell to $81.81.

The day after the IPO, the mispricing of Palm was noted by the Wall Street Journal and the New York Times. The nature of the mispricing was easy to see, yet it persisted for months.

In cases of equity carve-outs, a negative "stub value" indicates an extreme case of mispricing. The stub value represents the implied stand-alone value of the parent company's assets without the subsidiary, a projection of what the company will be worth after it distributes these shares.

In the case of Palm and 3Com, after the first day of trading, the stub value of 3Com, representing all non-Palm assets and businesses, was estimated to be negative $63, a total of negative $22 billion. Since stock prices can never fall below zero, a negative stub value is highly unusual.

2008 Jul 24 12:57 PM

[Deco:]

So Randy,what ru saying,where would u value COMS now?
Thanks

2008 Jul 24 10:07 PM

[RIO:]

COMS SHOULD BE BOUGHT OUT BY NOVEMBER 2008, THERE IS EVERY STRONG INDICATION FROM THE INSIDERS

2008 Jul 24 10:08 PM