Thursday night, gadget maker Palm (NASDAQ:PALM) reports third-quarter earnings. Let's dial in to see what's in store for investors.

What analysts say:

  • Buy, sell, or waffle? Twenty-three analysts cover Palm today. Four are buying, three selling, and the other 16 just want to hold. It's a two-star stock in our Motley Fool CAPS investor community, on the back of nearly 460 player ratings.
  • Revenues. Wall Street expects about $403.6 million in revenues, up a slim 3.9% over the year-ago $388.5 million take. It's toward the lower end of management guidance, which spans $400 million to $410 million.
  • Earnings. As for net income, the analysts expect about $0.12 per share, down from $0.19 per share last year. That's smack in the middle of the official $0.03 guidance range.

What management says:
Palm has brought in Morgan Stanley (NYSE:MS) to help the company explore its "strategic options," and a technology news site just reported that a buyout may be in the cards before this earnings report hits the presses, citing unnamed sources close to the deal. Possible suitors include two different private equity firms, plus cell phone giants Nokia (NYSE:NOK) and Motorola (NYSE:MOT).

What management does:
I'm using normalized net income data rather than GAAP figures, because a massive $224 million tax benefit in late 2005 throws the whole grid off-kilter otherwise. This is a more reasonable basis for presentation. As it stands, we have a strong gross margin trend with operating and net income following suit -- but the free cash flow ratio is moving the other way.

In any case, it looks like revenue growth is slowing down while earnings growth comes and goes. Slower revenue improvements plus better gross margins equals a company going after high-quality sales rather than blindly pursuing any revenue it can find.

Margin

8/2005

11/2005

2/2006

5/2006

8/2006

11/2006

Gross

30.2%

30.6%

31.3%

32.3%

33.7%

35.1%

Operating

5.7%

5.9%

6.8%

7.5%

8.1%

7.6%

Normalized Net

3.7%

3.9%

4.6%

5.1%

5.4%

5.0%

FCF/Revenue

8.3%

8.1%

12.0%

7.6%

5.7%

5.4%

Y-O-Y Growth

8/2005

11/2005

2/2006

5/2006

8/2006

11/2006

Revenue

27%

22%

26%

24%

19%

9%

Normalized Earnings

106%

31%

39%

55%

72%

41%
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:
I don't think Nokia would make a great Palm buyer. The Finnish company already has a good range of Treo-like smartphones, and doesn't really need to add that to its portfolio. Motorola, on the other hand, does want this kind of high-end bling-bling, the better to compete with Nokia and the ubiquitous Research In Motion (NASDAQ:RIMM) BlackBerry.

Anyway, we'll see who the mystery bidder is soon enough.

Palm is a Motley Fool Stock Advisor recommendation. See why, and what the Gardner brothers think about the buyout rumors, with a free 30-day trial pass to our flagship newsletter service.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure always gets great reception.