RBC research team on Palm
The timing was great. Motorola is rumoured to be interested in acquiring Palm, according to a CNBC report. Then Moto releases their financial results, fires some more executives (including the CFO), takes a bit of a pasting. Shortly thereafter, Palm puts out their numbers and takes the opportunity to talk about longer term plans.
So much for CNBC’s power to make a deal happen just by sheer force of will, even if the rest of us don’t understand the strategic rationale for it. Moto already has the Q for the wireless email crowd, and Palm hasn’t shot the lights out with a handheld device for a very long time. Remember when they launched the Palm 7, with its “pull” email feature, and you needed a separate email account as well? At the same time that RIM had their push email (your existing email address) product in the marketplace. Like putting a Pinto on the track during a NASCAR timetrial.
If Moto wants to be the big player in the game, they just have to call Fidelity and find out how much they want for their relatively massive stake in Research in Motion (RIM:TSX). If Fido will support a RIM takeover, it might actually happen once the hedgies pile in.
While RBC raised their target on Palm (changed the discount rate, and voila, the valuation goes up), UBS downgraded Palm to a sell (where it belongs) following the quarter; poor guidance and the fizzle to the Moto takeover rumour probably didn’t help, either.
Here’s RBC Capital Market’s take on the Palm results from their Equity Research Department:
“Q3 above consensus; some takeout speculation dissipates; maintaining SP, adjusting target.
Q3 Above Consensus. Revenues were $410.5M (up 5.7% Y/Y), above $404M conc. (RBC $406M) on sell-in of (delayed) Treo 750 at Cingular. Smartphone shipments were 774k (RBC at 725k) with 738k sell-through. Proforma EPS was $0.16 on higher revenues, better GMs (37%, above 36-36.5% guidance) above RBC/conc. at $0.14/0.12. PDAs were weak at $56M (vs. $73M RBC), down 44% Y/Y. Soft Q4 Guidance reflects higher 680 mix. Q4 guidance for $400-410M missed $416M conc, implying 0% Q/Q growth (vs. 6% Q3) reflecting expected higher (lower ASP) Treo 680 mix and ongoing PDA weakness. GM guidance for 36-36.5% was slightly down from Q3 and less egregious than expected. EPS outlook for $0.13-0.16 (inline with RBC) reflects ongoing cost containment, and appears conservative.
Takeout Shmakeout. Palm appeared defiant, focused on turnaround, not takeout, increasing our conviction that no takeout is imminent.
Palm affirmed pending Smartphone announcements (expected May, ahead of iPhone), aimed at recovering lost momentum.
Turnaround remains possible — but daunting hurdles remain.
Adjusting Estimates. On modestly better Smartphone momentum, our F07 estimates become $1,568M (-1% Y/Y), $0.69 proforma EPS (prior $1,578M and $0.67); Our F08 estimates become $1,815M (up 16% Y/Y), $0.82 proforma EPS (prior $1,769M and $0.80).
Valuation rangebound. Palm’s valuation multiple is expected to remain at 23x FTM EPS (vs. our prior 21x target multiple) on slight dissipation of investor pessimism and higher-value Smartphone rev. mix (vs. PDA). Upside remains constrained by ongoing competition and execution concerns. We expect further volatility from takeout speculation and new product ‘buzz’.
Reiterating Sector Perform and Adjusting Target from $15 to $18. Our $18 target is DCF-based (WACC of 11.5% (12.5% prior), terminal growth of 2% and FTM cash/share of $4.89) and represents 23x (21x prior) our FTM EPS vs. historical 17-24x.”