Reading Palm: Pre Sales and Stock Offering

Palm (NASDAQ:PALM) reported fiscal first quarter results after the close on Thursday, and the company answered some big questions that investors needed answered to justify the stock’s amazing run. This summer Palm stock rose above $16 per share, which is more than 10x the stock’s low last December. Of course, most of the stock’s momentum is due to the great potential of the Palm Pre handset, but potential was no longer going to be enough. There needed to be proof in order to satisfy investors that the price appreciation of Palm has staying power.

Many analysts had started to become a little more cautious on Palm stock in anticipation of the fiscal first quarter release. Peter Misek of Canaccord Adams lowered his revenue and earnings estimates to well below the consensus level this morning saying he is more cautious of Pre sales after conducting surveys and channel checks. He lowered his estimate for Pre unit sales by 33% from 750,000 units to 500,000. Considering the Pre is by far the most important product for Palm that could mean trouble for the stock.

Ilya Grozosky of Morgan Joseph & Co. was even more conservative in his view of Pre unit sales, anticipating just 400,000 units sold. Grozosky is one of the more bearish analysts having downgraded Palm shares twice; from Buy to Hold in April and then from Hold to Sell in August.

These estimates would place Palm’s devices well behind the industry leaders with Research in Motion (NASDAQ:RIMM) selling 7.7 million units last quarter, and Apple (NASDAQ:AAPL) selling more than 5.4 million iPhones in its second quarter. To date, Palm had not reported sales figures for the Pre specifically, and with so much riding on one device there many were skeptical of its ability to grab market share.

In combination with some bearish analysts on Wall Street, coming into earnings there was a substantial short interest in Palm. The options activity slid to the bears side into the report, with puts outnumbering calls. Not to mention, the Motley Fool CAPS investor sentiment survey thinks this stock will underperform the S&P. There is no doubt that many investors had lost confidence that Palm’s stock belongs at this valuation.

Palm answered investors concerns about growth and unit shipments for the Pre. Palm said that they shipped about 832,000 as of this quarter, which enabled the company to easily outperform Wall Streets expectations. First quarter EPS came in at a $.10 loss versus estimates of a 23 cent loss. Revenue also topped estimates easily. With Palm lowering the price of the Pre last week and a new smaller Pixi model due out soon, there will be the opportunity to expand on this market share going forward. The growth aspect is better than the doubters had anticipated.

Perhaps overshadowing the quarterly earnings results, the company announced a secondary offering of 16M shares. This will help raise capital for a balance sheet in severe need of assistance. Palm has burned through a lot of cash prior to the launch of the Pre and has had negative shareholder equity on their balance sheet for the past 3 quarters. With capital markets hospitable, this move makes a lot of sense.

We are reiterating our Fairly Valued rating on Palm as of this week’s report. Value investors will not be enticed by the fundamentals of this stock, but it is clear that this is not a “value stock”. If the stock were to trade on fundamentals it would be lower, perhaps much lower, but showing growth in arguably the hottest sector (smartphones) is driving their multiple higher. This stock does not suit or investment style at Ockham, but today was a big step towards justifying its lofty price.

Reading Palm: Pre Sales and the Secondary Offering

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Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

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