Foolish Forecast: Palm Gets the Brush-Off

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After beating earnings estimates all year long, PDA specialist Palm (Nasdaq: PALM) aims to close out its fiscal year 2007 with a round of applause on Thursday. Shouldn't pose much of a problem, right? All it needs to do to meet expectations is earn half as much as it did last year!

What analysts say:

• Buy, sell, or waffle? Seventeen analysts track the company with diffidence. Only two of them rate it a buy, and everyone else says hold.
• Revenue. On average, they're looking for less than 1% quarterly sales growth to $406.4 million.
• Earnings. Profits are predicted to fall 48% to $0.15 per share.

What management says:
The big news at Palm this quarter was undoubtedly its partial sellout to private equity firm Elevation Partners earlier this month. For Foolish details on the deal, read Tim Beyers' in-depth report right here. But the dime tour goes like this: Elevation bought a 25% stake in the company, diluting existing shareholders but infusing cash into their company in compensation (cash that will be paid out in the form of a $9 per-share dividend).

On the question of why a firm with massively positive free cash flow and more than half a billion bucks in the bank needed a capital infusion in the first place, your guess is as good as mine.

What management does:
Near the top of its income statement, everything looks hunky-dory at Palm, but the lower down you go, the uglier things appear. Gross margins are rising steadily, and have been for well over a year. Operating margins began to go off-track about six months ago (from a trailing-12-month perspective). As for net margins -- well, as ugly as they look, they don't at all portray a fair picture here. You see, Palm recorded a $224 million tax credit in the November 2005 quarter. That inflated its rolling net margin beyond all believability for the next three quarters, but the net returned to reality precisely one year later. Now, it's right back in the single digits where it should be.

Unfortunately, that also makes Palm the least profitable of almost any close competitor you could name -- Apple (Nasdaq: AAPL), Hewlett-Packard (NYSE: HPQ), Motorola (NYSE: MOT), Nokia (NYSE: NOK), or Research In Motion (Nasdaq: RIMM). About the only rival Palm still bests is Sony (NYSE: SNE). Talk about damning with faint praise.

Margin	11/05	2/06	5/06	8/06	11/06	2/07
Gross	30.6%	31.3%	32.3%	33.7%	35.1%	36.0%
Operating	5.9%	6.9%	7.5%	8.1%	7.6%	6.9%
Net	21.4%	21.6%	21.3%	21.0%	5.6%	4.4%

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:
David Gardner and the gang at Motley Fool Stock Advisor recently updated our members on how they view Palm. Unfortunately, the update came out just a bit too recently, and Fool policy won't allow me to release the details of their analysis until our subscribers have had some time to digest it -- but I'll give you a hint. We haven't yet sold the stock from our portfolio, but neither have we ruled it out.

What factors weigh in the balance, and at what price might we actually buy more shares? Current subscribers can find the answers to these questions by clicking here. Everyone else ... oh, what the heck. Take a free 30-day trial of the service and you can read it, too.

Fool contributor Rich Smith does not own shares of any company named above. Palm is a Motley Fool Stock Advisor pick. The Fool has a disclosure policy.