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Networkers hold out hope

Networking companies had a long, hard winter, but analysts say spring should bring something of a rebound.

Networking companies had a long, hard winter, but analysts say spring should bring something of a rebound.

Since mid-January, investors haven't been able to get rid of their networking shares quickly enough. That's when reports started circulating that sales were not keeping up with last year's growth rates, despite relatively strong quarterly reports from several of the industry's stalwarts.

Companies with known marketing or structural weaknesses such as Bay Networks (BAY) took the hardest hit, though the downturn touched everyone. Even market leader Cisco (CSCO) was punished; it lost 20 percent of its value in less than a month.

3Com (COMS) has been the most damaged by the selloff. The company took another sizable hit today, when the company announced preliminary third-quarter results that came in under Wall Street expectations. The stock fell more than 28 percent to close at 37-1/4, down from 52-1/4 on Friday. (See related story) Including today's drop, the stock has plunged by 46 percent since mid-January. Bay Networks closed at 18-5/8 today, down from 19-1/2 Friday. And Cisco finished the day down 8.1 percent to close at 58 a share, compared with 63-1/8 on Friday.

"Everyone is assuming that the networking business is slowing down and they're going to throw all of those stocks away," said Bert Hochfeld, an analyst with Josephthal Lyon & Ross in New York. "It's not just 3Com taking a hit today. Cisco is down, so are Ascend Communications (ASND) and Bay Networks."

The good news is that the downturn is probably temporary.

Business began slowing down late last year. Most of the mainstream corporate buyers are waiting to see which particular network topology becomes the most prevalent in a networking world increasingly dominated by intranets rather than proprietary networks. Revenue flow from telecommunications companies has also slowed downs as the telecommunications companies figure out how new equipment will fit in their operations following the deregulatory Telecommunications Act passed last year.

"Early adopters were buying networking equipment in August, but then there was a pause in November and December as more mainstream corporate buyers waited to make purchases," said Peter Swartz, an analyst with Salomon Brothers.

Others agree.

"I don't think there's been a fundamental change in demand, it's transitional," said Therese Murphy, an analyst with Smith Barney.

Murphy predicted even 3Com may start rebounding in June.

Salomon's Swartz thinks that most companies are now poised to move forward with their new networking purchases.

"My sense is that telco spending will return in 1997 and that corporate spending returned again in the January quarter," he said.

He thinks that Cisco will regain its momentum in the spring or summer, while even Bay Networks may start to rebound by the end of the calendar year. As for 3Com, Swartz agrees with Murphy that the company will start winning an ongoing price war with Intel over adapter boards in April or May. (Intel is an investor in CNET: The Computer Network.)

Chuck Hill, a spokesman for research firm First Call said Cisco has seen an overall increase among analysts' expectations. A majority of analysts who follow the company expect the networking giant to post earnings of $2.09 a share in fiscal 1997, up by one to nine cents from earlier estimates.

Analysts were not so positive about other networking companies. Hill said that for the past week, analysts have been shaving their earnings estimates for 3Com. Three analysts today lowered their third-quarter expectations for 3Com to 48 cents a share from the mean of 60 cents. He added that fiscal 1997 earnings estimates were dropped to $2.10 a share from $2.35.

Bay Networks has seen all 27 analysts who follow the company lower their earnings estimates since January 14, when the company announced its quarterly results. Analysts are forecasting the company will earn 58 cents a share for fiscal 1997 that ends in June, down from earlier estimates of around 90 cents.