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Time To Grab Palm Or Pawn It Off?

Posted: Nov 30, 2009 10:45 AM by Glenn Curtis

Tickers in this Article: NOK, RIMM, AAPL, PALM

Palm's (Nasdaq:PALM) story has been in the news a lot these days. The headlines Palm's Pixi and Pre have made and speculation on Wall Street that the company could be taken over by the deep pocketed Nokia (NYSE:NOK) have probably added somewhat to its fan club. But I remain uncertain about the company as a potential investment ahead of its second-quarter earnings report, which is due out in December.

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Why Dialing Up The Stock Doesn't Make Good Sense
Palm is a major player as a maker of communications devices, but I fail to see what makes the company so impressive from an investment standpoint, because it is quite expensive.

Perhaps I'm old school when it comes to investing, but I believe that a company should generally trade at a reasonable multiple of expected earnings and Palm does not. As of now, the company is expected to lose 39 cents this year and to earn just 40 cents next year in 2011. That means it trades at 27.5 times the 2011 estimate. That multiple would have to come down a bit before my interest was piqued.

Proponents will point to the fact that the company has exceeded Wall Street expectations over the last two quarters, but the company still has a long way to go to seriously win back investors. In two of the past four quarters, the company has also missed expectations. And in order to truly stand out, more upside surprises are going to be necessary.

Just for comparison, Apple (Nasdaq:AAPL), which is known for its iPhone and iPod, has beaten expectations in four consecutive quarters. Research In Motion (Nasdaq:RIMM) is also looking more and more intriguing in the upper $50s. It has beaten expectations for three quarters straight.

As far as the quarter that's scheduled to be announced, Wall Street is expecting the company to lose 32 cents per share, which seems probable. But even if the company pulls off another beat, posting any loss would discourage many investors from purchasing the stock. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)

A Takeover Play?
The takeover seems unlikely because current investors would probably want an even better price than the current market price, and I think the current market price is too steep given the nearer-term earnings outlook. A hypothetical buyer would be assuming a good deal of potential risk, which in this market doesn't sound too appetizing.

The Bottom Line
Palm makes great products and the company and its shareholders could end up having a bright future. But right now the shares are too pricey based upon the earnings outlook and lacks something to help it stand apart from other major technology companies.

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By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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