palmOne's Hand Slapped

There are always going to be times when you're wrong in your investing. Today, I'm tempted to wonder about whether David Gardner and I were wrong in picking palmOne (Nasdaq: PLMO  ) for Stocks 2005. Why? Because the smartphone and handheld computer maker yesterday said that products it had expected to ship earlier in its fiscal fourth quarter would be slightly delayed.

The news marred an otherwise strong earnings announcement and continues a string of recent missteps and unfortunate events. From botching the pricing on its Treo smartphone to losing its CEO, palmOne has had a rough go of it lately. And investors appear to be tired of waiting for good news. Shares in the stock are trading nearly 10% lower as I write this morning.

So, investor, should you sell? I wouldn't. Here's why:

  • All of the major talent that was brought from Handspring to help resuscitate palmOne has remained.

  • It's been 17 months since palmOne and Handspring combined. So we're still talking about a very new company in many ways.

  • Yet sales, earnings, and cash flow are all seeing double-digit improvements. Sure, estimates for next quarter were lower than expected. So what? Is this is a sprint or a marathon? I say the latter.

Listening to the conference call I heard a management team that knows it is dealing with production problems. It also knows that any investor can take a quick glance at the balance sheet and see that inventory has more than tripled in less than a year. Considering this is a company that has a long and sordid history when it comes to inventory management you can't blame some for running away screaming from the stock. But don't you be one of them.

Remember, except for the product delay, palmOne is doing exactly what it said it would. For example, it was going to invest to generate more revenue from smartphones. Lo and behold, in the latest quarter, smartphones accounted for 46% of revenue, up from 39% in the prior quarter. Now management says its inventory build-up will satisfy pent-up demand from carriers and that its inventory levels will decline in Q4 as smartphone sales spike to account for more than 50% of revenue for the first time ever. We've got no reason to doubt that will happen. If it doesn't, OK, sell.

Till then, watch the numbers and management's promises, and remember that this is a pioneering company with a white-hot product that trades for just 6% of the value of close rival Research In Motion (Nasdaq: RIMM  ) . Yeah, that's right, just 6%. Makes you wonder whether palmOne is a bargain at these levels, doesn't it? Me too.

For related Foolishness:

  • Let's not forget Nokia (NYSE: NOK  ) . It leads the smartphone market, after all.
  • But let's also hope it doesn't make any exploding versions.
  • The handheld market left palmOne empty-handed. But that may not be so bad.
  • At least one other Fool figures palmOne still has some fight in it.

Fool contributor Tim Beyers accidentally destroyed his old Samsung cell phone and stumbled his way into a new Treo 600. He hasn't stopped slobbering since. Ewwwww. What's your take on the Treo? Share your thoughts with other Fools at the palmOne discussion board. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what's in his portfolio by checking Tim's Fool profile, which is here. The Motley Fool has a disclosure policy.

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