Tuesday, November 28, 2006

Color on warning: Palm (NASDAQ:PALM)

Several firms are commenting on Palm (NASDAQ:PALM) following the warning issued last night:

- Merrill Lynch is taking their rating to Neutral from Buy noting that while Palm's design capabilities and valuation (ex ~$5 cash per share) remain attractive, they believe differentiation is getting more difficult vs. integrated (handset+service) rivals like RIM, and larger scale hardware-only competitors like Motorola and Nokia.

Palm cited product certification delays, and the firm believes the major reason was a complete miss (in 2Q) of Treo 750 shipments and a 2 week delay in Treo 680 shipments, both to Cingular. The magnitude of the miss also indicates possible price pressure on Palm's Treo 700p/w. Firm notes Palm's F2Q07 miss follows F1Q07 warning due to price competition from Motorola's Q smartphone, and F4Q06 miss due to delayed launch of European Treo 750v smartphone.

Although the firm sees no near-term catalysts, they believe Palm stock has limited downside from current levels. Palm's four new product cycles, including the recently launched Treo 680 and 750, could also help to revive prospects and sentiment in 2007.

- RBC Capital notes that in its Q1 call, Palm indicated it had already widened Q2 guidance to ''prudently' accommodate delayed product certification. This miss is another blow to investor
confidence in Palm's recovery.

The delay is ill timed, just as Palm faces intensifying competition from $199-$150 ASP Smartphones from RIM, Nokia, Motorola, Samsung HTC. The Treo 750 may now miss the important Christmas season, and its premium price (est. $400) may face resistance (Verizon has recently had to discount the 700w).

Incorporating the delay, RBC's F07 estimates become $1,584M (0% Y/Y growth, formerly 10%) and $0.73 proforma EPS (prior $1,735M and $0.90 EPS). F2008 estimates become $1,766M (11% Y/Y) and $0.84 proforma EPS (prior $1,956M and $0.96). Tgt goes to $15 from $16. Maintains SP rating.

- JP Morgan says that in their view PALM is struggling with bigger issues relating to product cycle, positioning and pricing, in the context of intensifying competition.

The company is under intensifying price-based competitive pressure, and delays in shipping the 680 and 750 could persist into the peak holiday season, crimping sales further. PALM is trading at 20.8 times revised fully taxed FY07 PF EPS of $0.74, a 26% discount to the mean of firm's coverage universe on a current year basis and an ex-cash multiple of 17.2x fully-taxed PF FY07E EPS of $0.60 ($5.05 cash/share). Maintains Neutral.

Notablecalls: Usually these one-time issues are buyable but in PALM's case we have an exception to the rule. They guided down on June 30 and warned on Sept 7. And now warned again, saying "Oops, we're going to miss our biggest qtr." There isn't much investor confidence left after last night. I expect the shares to go sub-$14, maybe even today. The last prints in after hrs trading were around $14.60-$14.70.

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