Thursday, September 07, 2006

Calls of Note Part 1

Several firms are commenting on Palm (NASDAQ:PALM) this morning after the revised its Sept quarter revenue expectations:

* JP Morgan notes PALM pre-announced a slight F1Q07 revenue miss last night. The company expects sales to be in the range of $354-$356, 7% lower than the mid-point of prior guidance. PF EPS guidance of $0.18-$0.19 was unchanged, suggesting good cost discipline below the line. Firm is adjusting their revenue estimate to align with the high end of revised guidance ($355.3m) but leaving EPS unchanged.

The accompanying press release points to two new product launches in the immediate future, which is likely to buoy the stock, notwithstanding F1Q's slight disappointment.

Firm continues to believe PALM's F2Q07 should manifest above-normal positive seasonality in shipment growth owing to sell-in of new product to the European channel (Vodafone). However, channel checks conducted last month in the UK, France and Spain indicated significant QWERTY based competition (esp. Nokia E61, HTC products and RIM) in the smartphone category, and they thus remain cautious regarding the European appetite for the forthcoming Palm

Maintains Neutral. PALM is trading at 14.8x fully taxed FY07 EPS of $1.05, a 32% discount to the mean of coverage universe on a current year basis and an ex-cash multiple of just 11.5x fully-taxed PF FY07E EPS of $0.93 ($4.79 cash/share).

*Piper Jaffray notes that consistent with their channel checks, they noted increasing competition at Verizon and Cingular and lowered margin estimates due to increased competitive concerns and revenue estimates due to checks indicating weak Treo sales at Cingular.

While the firm believes the newly launched 700wx at Sprint and upcoming launch of the Treo 750 for Vodafone and then other WCDMA carriers should help reaccelerate Palm's revenue from the disappointing August results, they have slightly lowered their forward estimates due to the August quarter shortfall.

Based on August quarter shortfall, they are lowering FY07 estimates from EPS of $1.01 on revenue of $1.82B to $0.99/$1.74B and FY08 estimates from $1.06 on revenue of $2.05B to $1.05/$1.97B.

Maintains Mkt Perform and $16 tgt.

Notablecalls: I highlighted PALM as a potential short on Tuesday. It was actually a bad call as the shares rallied over the next couple of days. After the news broke last night the stock traded down about 7-8% in aftr mkt trading. Can't take any credit for that. While I like PALM around current levels, I think there is no trade to be had here just yet. The valuation (about 1/3 on mkt cap consists of cash) keeps it from gapping down enough to see a meaningful bounce from the lows. Uncertainty regarding n-t product demand (competition) will keep it from trading meaningfully higher from here. For the bulls, I do like the idea behind Blackberry Connect and think it may prove to be a meaningful revenue driver in the next couple of qtrs. And did I mention the rumors of RIMM buying PALM?

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