Analysts Cautious After Palm Disappoints

Palm (PALM) shares are off sharply after the company provided a highly disappointing forecast for the February quarter.

Everyone understands that the recent recap of the company by Elevation Partners, complete with an infusion of ex-Apple (AAPL) technical and design talent, is going to take some time to bear fruit. The trouble is that Palm’s current situation is looking worse and worse: the company has a bigger hole to dig out of it than previously thought.

For instance, not all that long ago, it looked like the company’s market cap was basically equal to its cash position. The current market cap is about $569 million; cash at the end of the May quarter was $561 million. But cash and equivalents at the end of the October quarter dropped to $292 million, which is less than the company’s $396 million in long-term debt. So maybe it is not the raging value play that some people want to believe.

The Street commentary on the stock this morning is filled with cautions and caveats. Here are few examples:

• Citigroup’s Jim Suva repeated his Sell rating and $4 price target. He notes that the company is lagging the growth in the overall smartphone market; its 29% increase in units is about half of the broader sector. “Smartphones are not the tide that lifts all boats, and we think that Palm as further challenges,” he writes.
• Pacific Crest’s James Faucette notes that the stock trades at less than 0.5x his 2009 revenue estimate. He maintains an Outperform rating on the stock, but notes that “the company must execute over the next few quarters before meaningful share appreciation will occur.”
• UBS’ Maynard Um keeps his Sell rating and $5 target, advising caution on the stock given “lack of visibility to differentiated products, increasing competition, a lack of a cash valuation support and aggressive pricing actions.”
• Credit Suisse’s Michael Ounjian maintains a Neutral rating, but cut his price target to $5.50 from $6. He expects “increasing competition to continue to adversely affect Palm’s market share and operating margins.”
• RBC Capital’s Mike Abramsky repeated his Sector Perform rating, and cautions that the stock is likely to remain range bound “pending investor visibility to consistent execution, positive catalysts and recovering financial performance as evidence Palm’s turnaround is taking hold.”

Palm Wednesday is down 51 cents, or 8.6%, at $5.42.