Novice Investing - Talk With The Palm

Date: Monday 01st 2008f December 2008 04:52:15 PM

Talk With The Palm - 11/28/2006

By: Novice Investing Staff

The company that invents PDA, Palm Inc. (PALM) was hammered early Tuesday after announcing the delay on its new Treo smart phone launch. As a result, Palm now expects second quarter earning to be 10-11 cents per share down from 15 to 18 cents per share range. Meanwhile, revenue figure for the quarter is revised down by $ 40 Million.

Some say that this delay would boost Palm's earning in later quarter but we beg to differ. First of all, innovation is key in this sector. When you delay the launch of your products, you cannot make it up on the next quarter. Yes, price of new gadgets will tend to get lower over time. That same Treo phone you saw selling for $ 799 would probably be sold for less than $ 500 next year. Meanwhile, as Palm reaches its manufacturing efficiency slower than competitors, its profit would be adversely affected by Treo product delay.

Research in Motion Ltd. (RIMM) with its Blackberry wireless device had been dominating this sector for a while. Despite having equal revenue with Research in Motion, Palm is valued at $ 1.60 Billion while Research In Motion spots a market capitalization of $ 25 Billion. Now, this can mean several things. One is that investors expect RIMM to continue its wireless domination and put Palm and others out of business. It can also mean that RIMM's stock is overvalued or Palm stock is relatively undervalued. Regardless what the actual condition is, the launch delay of Palm's Treo 750s only solidify RIMM's positions.

What is puzzling about Palm is that it spots a gross margin in the low 30s% in the last several years. This is slightly better than a retailer's gross margin. Palm looks like a manufacturing company with obsolete products. You want some examples? How about Walmart with 24% gross margin? or the struggling Rite Aid with 27% gross margin? If you are a typical manufacturing company like Hasbro, gross margin would be around 50%. Even clothing company which regularly discount its obsolete inventory has a better gross margin than Palm. For example, Gap has gross profit margin in the high 30s%

So you see, there is operational issue with Palm. Does Palm has to do a lot of heavy discounting of its products to compete against Research in Motion? Research in Motion has a gross profit of around 50%, which as we mentioned before, is a typical margin for a manufacturing company. What would bring Palm's gross margin up? A new way of manufacturing? An exciting new products? We don't know. Overall, however, Palm still has a solid balance sheet with a positive net cash of $ 530 Million or $ 5.10 per share. This is about one third of its market capitalization, which can be considered good.

Share price is down around 6% due to this announcement of Treo's delay. It will cost the company a lot more to replace revenue gained from early adopters. However, Palm has a balance sheet that is strong enough to weather this storm. It is not even expected to post any loss in the fiscal year of 2007 and 2008. Risk of bankruptcy is almost nil at this point. Further drop into the single digits will attract competitors to acquire Palm.

END

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Palm Inc. (PALM) or any other securities.

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