Palm (NASDAQ:PALM): Encouraging management meeting; Reiterate Buy - Merrill Lynch/BAM

Merrill Lynch/BAM is out very positive on Palm (NASDAQ:PALM) this morning following meeting with management. Firm reiterates their Buy rating and $20 price target ahead of multiple catalysts.

Management meeting reinforces Merrill's positive views
Firm notes they had an encouraging meeting with Palm CEO Jon Rubinstein, CFO Doug Jeffries and IR head Teri Klein. Their key takeaway: despite increasing smartphone competition Palm can maintain differentiation and remains well positioned to launch its products with multiple new Tier-1 carriers in early 2010 by which time it should have a robust apps catalog. While they expect the stock to remain volatile, the recent selloff creates an interesting buying opportunity, in Merrill's opinion, for a company with an attractive platform, selling into a high growth market, and at a compelling valuation. (<1x CY10E EV/S, <11x PE on $1/sh in EPS power). Next catalyst is next week’s (15-Nov) launch of Palm's Pixi smartphone at Sprint.

Substantial channel expansion in 2010
The current pressure on Palm stock is due to limited distribution of its products at just 5 carriers led by relatively weak Sprint. However they expect this situation to change substantially in early 2010 as several new tier 1 carriers (including VZ) launch Palm's smartphones. This channel expansion supports their expectations for nearly 80% HoH ramp in 2HFY10 sales that management still seems comfortable with, in Merrill's view. They note that in the past Palm has sold products via 100 carriers.

All about the ecosystem
While Palm has a breakthrough operating system, its ~350 apps catalog pales in comparison to multiple thousand apps of RIM, Android and Apple. However Palm is adding 50-100 new apps to its catalog (still in beta) every week, and they expect new e-commerce features and mid-December formal opening of the apps store to all developers. Merrill highlights here a new capability that Palm is building that will enable customers to download apps by just clicking on a web URL (as opposed to going to an app store). They believe this will dramatically improve discovery of apps and attract attention from developers. They also note new tools that will let developers integrate apps with other device functions such as the calendar. Palm also recently hired few people from Mozilla to further its apps effort.

Merrill likes Palm's new Pixi
The firm had a chance to play with Palm's new Pixi smartphone that Sprint will launch this weekend (for $99 retail) along with new advertising campaign. Pixi retains all the cool features of Palm's webOS and user interface but in a smaller, cheaper and lighter package. Despite the small size the keyboard was surprisingly easy to use. They expect the product to target a younger demographic compared to the power powerful and fully featured Pre product.

Strong balance sheet for investing in marketing campaigns
With its recent secondary offering Palm now has over $570mn to co-invest with carriers in marketing programs and accelerate R&D of new products and applications. While cash burn could persist for another 1-2 quarters they believe the company has the required resources to execute on its current business plan.

Notablecalls: First of all, I have and continue to be skeptical of PALM on the long-term (see the archives).

Yet, with the stock down 40% from its recent highs in just over a month, it may be due for a bounce. Here's why:

- As Merrill highlights, PALM is going to add several new tier-1 carriers like Verizon over the coming months. This will help sales.

- Palm is set to launch their new Pixi smartphone this weekend at Sprint. Reduced features at a reduced price seems one for the kids. With a new ad campaign it will likely help sales & feed the hype.

- PALM's short interest stands at over 30%.

- The secondary overhang is gone. Palm is flush with cash (to burn) and will likely stay off the market for at least couple of years.

- Finally, there's the ever present chance of a takeover.

So, a beaten down stock, with catalysts and hefty short interest.

I think you can catch a nice 50c-1pt bounce in PALM as soon as today, putting the $11.50-12.00 range in play.