Foolish Forecast: Sweaty Palm

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For six straight quarters, handheld computer maker Palm (Nasdaq: PALM) has wowed the Street with its consensus-beating earnings numbers. Can the company do it again when it reports Tuesday afternoon?

What analysts say:

• Buy, sell, or waffle? Twenty-one analysts now follow Palm, giving the firm five buy ratings, 13 holds, and three sells.
  
  
• Revenues. On average, they're looking for a 12% decline in sales to $392.3 million.
  
  
• Earnings. Profits are predicted to drop 38% to $0.15 per share.

What management says:
I'd love to tell you what Palm's management had to say leading up to next week's announcement, but truth be told, my Foolish colleague Tim Beyers has already told you, and said it much more eloquently than could I. So I'll defer today, and point you toward his twin columns:

• When Will Palm Handle Its Business?
• Another Buyback in Palm's Hand

Not sure if it's worth the trouble of clicking through? Here's just a taste of what Tim had to say: "Were Palm to only match that 14% average, and generate no better than 3% gains thereon till eternity, discounted at 11%, the stock would be worth at least $18 a share by my back-of-the-napkin math. But, of course, I'm assuming that competent management can generate at least industry-matching growth. As of today, that's anything but a sure bet." Ouch.

What management does:
So clearly, Tim wasn't impressed with the firm's earnings warning. But is he overreacting? I think so. (Warning: The Fool is anything but monolithic. Here, we disagree early and often. And publicly.) One quarter's "certification delay" does not a bad company make. To the contrary, over the last 18 months, Palm has proven itself a strong contender, growing its rolling gross margins nearly 300 basis points, and its rolling operating margins nearly 200. (As for the net, remember, that's been inflated by the $224 million tax credit recorded in the November 2005 quarter. By the time Tuesday's results come out, it will have gone bye-bye from the trailing-12-month results, giving us a more realistic view of the firm's net profitability.)

Margins %	5/05	8/05	11/05	2/06	5/06	8/06
Gross	30.8	30.2	30.6	31.3	32.3	33.7
Op.	6.3	5.7	5.8	6.7	7.5	8.1
Net	5.2	4.9	21.4	21.6	21.3	21.0

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Want a tie-breaker vote to help you decide whether the lousy results Palm will be posting next week should disqualify it from contention for your investing dollars? Referring back in August to another problem Palm had (a lowered sales forecast due to its Treo 650 failing to meet environmental standards in Europe), David Gardner (who recommended the company to subscribers of Motley Fool Stock Advisor last year), reminded us that "Short-term thinking lends an opportunity to buy Palm at a lower price."

In fairness, David was referring to a different Palm flub when he said that. His advice may change when he updates Stock Advisor members on every one of his 57 stock picks later this month. Want to be first in line to hear his latest thoughts? Take this free trial to the newsletter, and you will be.

Competitors:

• Apple (Nasdaq: AAPL)
• Hewlett-Packard (NYSE: HPQ)
• Motorola (NYSE: MOT)
• Research in Motion (Nasdaq: RIMM)
• Siemens (NYSE: SI)
• Sony (NYSE: SNE)

Fool contributor Rich Smith does not own shares of any company named above.