For five straight quarters, handheld-computer maker and Stock Advisor pick Palm (NASDAQ:PALM) has wowed the Street with its consensus-beating earnings numbers. Can the company do it again when it reports earnings on Thursday and get its fiscal 2007 off to a good start in the process?

What analysts say:

  • Buy, sell, or waffle? Seventeen analysts follow Palm, giving the firm five buy ratings, 10 holds, and a pair of sells.
  • Revenues. On average, they're looking for just a 4% boost in quarterly sales tomorrow, to $354.4 million ...
  • Earnings. ... and a 14% drop in profits to $0.18 per share.

What management says:
Palm spilled the beans on its fiscal first quarter 2007 a couple of weeks ago, when it released its "Preliminary Q1 FY07 Results." Thanks to worse-than-expected Treo sales, the firm thinks it booked about $355 million in sales, or 7% less than it had previously predicted. Regardless, it stuck to its previous profits estimate of $0.13 to $0.14 per share in GAAP profits.

Speaking of which, the $0.18 you see the analysts predicting above? That's a pro forma number, and it matches the low end of what Palm predicted and still predicts -- which would seem to set things up for a positive earnings surprise on Thursday. Then again, perhaps it won't. Mr. Market sold the stock off by 8% in the wake of the Sept. 6 "sales warning," and the stock still trades 5% under where it was before the warning came out, so it appears that investors are looking for nothing but bad news on Thursday.

What management does:
Yet a Fool can't help noticing that over the past four quarters, Palm's rolling gross and operating margins have continued to climb. (Sure, the rolling net margin jumped even more, but we aren't going to pay attention to that, because the jump is derived almost entirely from a one-time, $224 million tax credit the firm recorded in the quarter ended in November. Similarly, when the tax credit falls off the other end of the rolling, four-quarter-long timeline three months from now, we won't wail in anguish at the disappearance of the apparent 21% profit margin.)

Margins %

2/05

5/05

8/05

11/05

2/06

5/06

Gross

30.9

30.8

30.2

30.6

31.3

32.3

Op.

6.5

6.3

5.6

5.8

6.7

7.5

Net

5.2

5.2

4.9

21.4

21.6

21.3
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:
In his August update, Stock Advisor co-pilot David Gardner had this to say: "Palm shares got a drubbing when [the company] lowered its sales forecast for the current quarter. Because the Treo 650 doesn't meet environmental lead requirements in Europe, Palm has decided to withdraw it. Meanwhile, the delayed launch of the Treo 700w, which features Windows OS and targets corporate customers, will hurt this quarter's earnings."

David advises shareholders to look beyond these short-term problems, however, to focus on the firm's promise of 20% or better sales growth this year, and to take advantage of the stock's price weakness to buy Palm at a discount.

Competitors:

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

While Palm's news is sure to frighten investors, and perhaps with good reason in the short term, David's focus on the long-term horizon has helped his picks generate 51% returns for Stock Advisor members over the past four years, against just 21% returns for the S&P 500. Do you have the guts to buy into a selloff and claim similar profits for yourself? Take a free trial of Stock Advisor and find out.

Fool contributor Rich Smith does not own shares of any company named above. The Fool's disclosure policy never fails to meet standards.