Weak Outlook for 3Com Corp.
With the acquisition by Bain Capital now off the table, 3Com Corporation (COMS) has begun trading on fundamentals of the business, which we believe are poor. Although a strong cash balance had provided support to COMS shares in the past, the acquisition of the remaining portion of its HC3 joint venture has eroded its cash position to $0.44 per share, a negligible amount.
Although Q308 results were strong, the company does not appear that it will follow through on this in Q4. We therefore reiterate our Sell recommendation on the shares of COMS and again lower our price target to $1.80.
Since the acquisition by Bain was announced on September 28th, 3Com shares had received price support from expectations that the deal would be completed at $5.30 per share in cash. Prior to this announcement, COMS shares were trading in the mid $3.00 range. We do not expect any positive catalysts given the subdued economic environment and poor competitive position of 3Com.
Moreover, the company's cash position, which had provided support for the shares in the past, has diminished to a negligible level following 3Com's purchase of its joint venture with Huawei. We believe there are better investment opportunities available. Without the potential acquisition on the table, our price target of $1.80 represents a multiple of 12.0x estimated fiscal 2008 EPS of $0.15.
Jabil Circuit Struggles Continue
Jabil Circuit, Inc. (JBL) has been struggling to meet expectations in a slowing macro economic environment. Despite weakness, Jabil's financial metrics are improving as the company wraps up restructuring activities, leading to improved profitability.
However, the near-term risks of slowing end-markets have forced the company to issue a disappointing revenue guidance for 2008, and we don't believe visibility will improve over the near-term. Although short-term challenges are likely to persist, the long-term looks more positive, with new program wins in computing and storage, peripherals, and networking. We, therefore, maintain a Hold rating on the shares of JBL and lower our six-month price target to $10.
Shares of Jabil have fallen significantly due to concerns about the health of its end-market. The stock is currently trading at its 52-week low, which reflects a P/E of 9.6x our 2008 EPS estimate of $0.97, a discount to the industry mean and S&P 500. Management also updated guidance for the full year 2008. It currently expects full-year revenue in the range of $12.6 billion to $12.8 billion versus previous guidance of $13 billion to $13.4 billion.
This decline in forecast is due to the softening macroeconomic environment. Management expects slowdown in end-markets, which will reduce its growth rate and impede margin expansion for the next quarter or two.
