Palm: Zero Price Target May Open Special Buy Opportunity

by: Markos Kaminis

Palm's (Nasdaq: PALM) future is uncertain and its stock price can now be counted in dollars on the palm of one hand. I would AVOID Palm in the very near term, due especially to the hoopla around the zero price targets set by two separate analysts. However, the very unique action of those analysts may in the end provide a special opportunity as well. Thus, I would keep the trigger finger ready to buy on an effective operational mitigation effort or the advent of suitor tech-straordinaire!

Palm shares topped the most active list Friday, but on the wrong side of the board, dropping 29% through the close. The stock marked a new 52-week low, closing at $4.00, as compared to its high water mark for the year of $18.09. That is quite a ways down in any market, but even worse in a 12-month period that had the broader market rising sharply.

The smart phone pioneer was toppled by a weak earnings report and disappointing corporate guidance published Thursday after the close. Roughly 408K Palm products sold in the company's quarter ended February 26, which compares horribly against Apple's (Nasdaq: AAPL) 8.7 million iPhones. Palm was already well understood to be a minor player in the broader market, so what really impacted its shares was the fact that sales dropped 29% from its previous quarter, leaving a hefty stock of products sitting in retail back store rooms and warehouses.

Palm lost $0.61 cents a share on an operating basis, well worse than the consensus of analysts had foreseen, which according to Yahoo Finance/ThomsonFN, was a loss of $0.42 per share. In the prior year period, Palm lost $0.89 per share, but that was before the release of its latest product lines led by the "Pre" and "Pixi". The company only brought in revenues of $91 million last year. This year's top line totaled $350 million, which topped the company's recently guided range of $285-$310 million. Why so glum then you ask?

Well, Palm apparently shipped a ton of product at the close of the quarter, with a total of 960K smart phones sent to distributors, carriers (NYSE: VZ, NYSE: S, NYSE: T) and retailers (NYSE: BBY, NYSE: WMT), too many of which still remain on shelves (if they even made it that far). That means that orders for Palm's fiscal fourth quarter will be down significantly. New York based Jefferies Group (NYSE: JEF) estimates Palm's Q4 revenues will only amount to $150 million, which does not compare very well at all to the analysts' consensus view for $305 million. It did not help the stock either, when two analysts downgraded the shares. A Kaufman Brothers analyst cut the stock to hold from sell, and a Morgan Joseph analyst cut to underperform from hold. Adding insult to injury, or perhaps just telling it like they saw it, two analysts also set zero dollar price targets, creating quite a stir.

The pressing problem against PALM shares extends beyond just one quarter, because if Palm's new products are not competitive against the stiff competition at Apple (iPhone), Research in Motion - Nasdaq: RIMM (Blackberry), and Google - Nasdaq: GOOG (Android), then sales might never reach critical threshold. Palm might die off as a result, like other pioneers that failed to translate early success into sustainable operation.

The company is currently actively attempting to mitigate the sales drop-off by sending product communications representatives to retail locations. The move is being undertaken with hope that customers' servicemen on the retail floor might gain a better understanding of Palm's new goods... and so move more product. Palm is also launching a high profile television marketing campaign through the first couple weeks of the NCAA basketball tournament.

There also remains possibility that Palm's critically acclaimed smart phones could attract the attention of a larger technology company that could perhaps use a foothold into the smart phone market. Hewlett-Packard (NYSE: HPQ) is one name that has been thrown around by industry insiders. That hope and possibility alone is what sets the floor for Palm now, as analysts measure its lifespan based on its current cash burn rate (one analyst estimates that time span at 12 months, considering its expensive ad campaign). Unfortunately for PALM, raising capital now would not be so easy given its most recent numbers. Thus, it appears the company missed its chance to do so between quarters.

Buyers of PALM risk the wealth cutting possibilities that accompany attempting to catch a falling knife. However, as the stock settles and the company explores possibilities with potentially salivating callers, Palm might grasp gains once again. As an analyst, I would be inclined to favor an "avoid" recommendation at this point, since today's action should reflect a good portion of the new information.

While risk of obsolescence and bankruptcy remains a strong possibility for Palm, I would still keep a keen eye on the broader tech sector for a potential suitor. Palm would very likely only communicate this possibility after exhausting informal outreach. By that time, the stock would likely be significantly cheaper, and the company in a bad seller's bargaining position. So we would not bet on that event at this early stage.

If consulted, I would advise Palm executives to give suitors a chance to call over the next several weeks, and then make outreach of your own; AND then close a deal if the company's sales mitigation efforts are not having the intended impact. Waiting too long to close this type of deal often costs shareholders dearly, and several analysts have set their price targets at $0 already, frightening more than a few investors of that possibility. Still, those headline catching moves might just create opportunity for risk takers in a bit.

In the meantime, we would want to know who is coming and going from Palm headquarters and where Palm executives are traveling to.

I would AVOID Palm (Nasdaq: PALM) for now, though with a finger on the trigger.

Disclosure: No positions