Cramer’s Tech Specs: 3COM

Investors who want a “cheaper, smaller, speculative” stock than Cisco Systems should buy 3COM, Cramer said Friday. The company just reported an “unbelievably fabulous” quarter, beating the Street’s estimates and raising guidance, and “that made me a believer.”

3COM and Cisco operate in the same space, networking equipment, and it’s a key element of Cramer’s latest favorite growth trend: the mobile Internet. They make Ethernet switches, routers, Internet-protocol telephony, wireless networks and similar products. Wherever there’s a need for a better connection and more bandwidth, these companies make it happen. The big difference is that 3COM often charges less, and that should allow them to start taking market share from Cisco.

The depression/recession of late 2008 put the upgrade of many data centers on hold, Cramer said, which has pushed the currently running networks to their fullest capacity and created an increased demand for gear needed to run them. So business is good for 3COM. And the orders are coming in from both the consumer and enterprise sides, as companies upgrade their own networks to utilize new technologies that make their IT applications more efficient.

3COM has another force driving sales right now as well, China, where it’s been growing steadily since 2003. Remember, China committed $40 billion to build out its wireless infrastructure, and 3COM, through its joint venture with Huawei, will take advantage of that. The company already controls 32% of the Ethernet-switch market and 33% of the router market there. Cisco is bigger in the Middle Kingdom, but those numbers are still significantly higher than 3COM’s standing throughout the rest of the world: just 3%. And 3COM’s direct business in China accounts for 40% of total sales, and it’s growing.

H3C, as the joint venture is called, sells to larger enterprise clients than 3COM’s main business, which focuses on small to mid-sized companies. H3C’s branded products recently launched outside of China, and Cramer’s predicting that even a small bump in market share outside of the company’s geographical base “could be huge for 3COM’s earnings.”

Business stabilized last quarter for 3COM in all of its locations, Cramer said, with more and bigger deals coming from North America, too. The balance sheet holds $667 million in cash but just $200 million in debt. Only four analysts cover the stock – two buys and two holds – so the stock could go higher as 3COM attracts more attention.

One final point from Cramer: Bain Capital made a $5.30-a-share offer for 3COM about two years ago, but the government stopped it for fear that China would be able to breach US network security, as the Defense Department relies on 3COM’s cyber-security products. The stock, trading at about $4.95, is below that offer, which should be 3COM’s floor, Cramer said, and “I don’t think it can get that much cheaper.”

So what’s the bottom line?

“After that incredible quarter, I think 3COM has the best opportunity to take networking market share in [its] history,” Cramer said. “This tech stock is a buy, buy, buy.”

Cramer's charitable trust owns Cisco Systems.

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