Palm: And Now It’s All About the Pre

Jun.26.09 | About: Palm, Inc. (PALM)

Palm (PALM) shares are off to an impressive start Friday morning, confirming last night’s after-hours rally, as investors celebrate a better-than-expected fiscal Q4 financial report. The quarter’s results got a top-line boost from the first wave Pre shipments into the channel, but that doesn’t really mean a whole lot, given there was no sell-through of the new phone until after the quarter ended. EPS got a lift from a number of one-time items, and the loss would actually have been worse than expected otherwise.

The company gave only the vaguest of guidance, indicating that it was possible it could turn cash flow positive in the second half of the May 2010 fiscal year, and asserting that long term it can his gross margins of 30%-plus. Palm execs spent most of the post-earning conference call trying to explain its fairly confusing presentation, which included subscription accounting for the Pre, but not other handsets, and declining to even hint at any real numbers on the Pre. Most of the analysts worked some Excel magic and came up numbers on how many Pres actually were shipped in the quarter, but for the numbers that really matter - how many have been actually purchased - there was no answer supplied.

The analyst reaction to the report has largely been positive, with most analysts adjusting EPS models, and a few raising price targets. Here’s a rundown on this morning’s batch of commentary:

First, the bulls:

  • Vivek Arya, Bank of America/Merrill Lynch: He repeated his Buy rating, and boosted his price target to $23, from $16. (The stock closed at $14.02 in yesterday’s regular session.) He noted that sales were better than expected, while cash burn was less severed than feared. Arya says the Pre is off to a strong start, which is pretty much what Palm said on the call. He seee calendar 2010 Pre shipments of 6 million, above the Street by about a million. He also said planned shipment of developer SDK in September could drive apps growth by 100x.
  • T. Michael Walkley, Piper Jaffray: Maintains Buy rating, raises target to $18, from $14. He estimates Pre shipments in the May quarter at 60,000 to 65,000, above his forecast of 50,000. Walkley thinks there will be carrier announcements in several more geographies in the next several months.
  • Jonathan Goldberg, Deutsche Bank: Keeps Buy rating and $16 target. He estimates Pre shipments in the quarter at 73,000, above his forecast. Goldberg writes that he would have liked more clarity on Pre shipments and margins. He now sees unit shipments of 1.2 million in calendar ‘09 and 6 million in 2010.
  • Mike Abramsky, RBC Capital: Keeps Outperform rating, $18 target. He says the company shipped 59,000 Pre units in the quarter, which he says indicates upside to his estimate of 150,000 sold to date.
  • James Faucette, Pacific Crest: Keeps Outperform rating and $17 target. Faucette contends the company could ultimately be worth at least $5 billion to a potential acquirer because of the value a major handset OEM could get from the WebOS - he cites Nokia (NYSE:NOK) as one potential buyer.

And now, the skeptics:

  • Jim Suva, Citigroup: Repeats Hold rating, with target to $19.50, from $14. He estimates 72,000 Q4 Pre shipments, above his estimate of 50K. “Pre certainly has buzz, but sustainability is a key question in our view,” he writes. Suva advises not chasing the stock here.
  • Maynard Um, UBS: Keepos Neutral rating, but raises target to $15, from $12. Um writes that adjusting EPS included one-time items - warranty liability reduction and sales of previously written down products - loss per share would have been below expectations. But he also says margins were better than expected, and he lifted estimates. “We would wait for better visibility to execution, sustaiend demand and profitability to get more constructive.”
  • Amir Rozwadowski, Barclays Capital: He maintains an Underweight rating, but boosts target to $12, from $9. He estimates initial Pre shipments at 60,000. He says management decision not to provide guidance was “disheartening,” and writes that “we emerged with limited incremental visibility on key questions on Pre demand as well as strategy around carrier and product diversity.”
  • Paul Coster, J.P. Morgan: He stays Neutral, with target up to $10.50, from $7.50. He estimates there were 50,000-60,000 Pre units shipped in Q4, and contends “the conference call yielded little new information.”
  • Simona Jankowski, Goldman Sachs: Keep Neutral rating; target to $13, from $12. She says the after-hours 15% rally was “overdone,” given Pre shipments were about in line with her estimates, and the source of upside was mostly due to one-time factors. She estimates 475,000 Pre shipments for the August quarter, and 4,025,000 for FY 2010. She says the stock is already discounting market share moving from 2% of smart phones now to 5% by calendar 2012, “a reasonable though certainly not conservative expectation.”
  • Matthew Sheerin, Thomas Weisel Partners: Maintains Market Weight rating, moves target to $12.50, from $10.50. “With so many unaswered questions and such limited visibility into the company’s strategy, we beleive a long-term investment in Palm requires a leap of faith in a market with rapidly growing competition and heavyweight incumbents.” He professes to a near-term positive bias, noting that a large short interest could cause a squeeze.

PALM Friday morning is up $1.39, or 9.9%, to $15.41.

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