March 4 (Bloomberg) -- Palm Inc., maker of the Treo and Centro phones, fell 4.3 percent in Nasdaq trading after third- quarter sales missed analysts’ estimates and Standard & Poor’s lowered the company’s credit rating.

Revenue dropped to as little as $85 million in the period ended Feb. 27, hurt by dwindling demand for older models and a delay in shipping the new Treo Pro, Palm said yesterday in a statement. Analysts on average projected sales of $160.1 million, according to a Bloomberg survey.

Palm, which pioneered mobile devices with its Pilot products more than a decade ago, is introducing a new model called the Pre this year to win back customers from Apple Inc.’s iPhone and Research In Motion Ltd.’s BlackBerry. The company is striving to return to profitability after six straight quarters of losses.

“Palm is more dependent on a successful Pre launch,” said Mike Abramsky, an analyst at RBC Capital Markets in Toronto. He expects Palm shares to perform in line with peers. Yesterday’s report “reasserts the elevated risks to Palm’s turnaround and valuation,” Abramsky said.

Palm, based in Sunnyvale, California, fell 32 cents to $7.06 at 4 p.m. New York time in Nasdaq Stock Market trading. The shares have more than doubled this year, bolstered by speculation that the touch-screen Pre will be a hit. Palm showed off the phone in January at the Consumer Electronics Show in Las Vegas.

Waiting Game

“The fiscal 2010 sales assumptions were going to be low for the Treo or Centro -- now they are going to be even lower,” said Matt Thornton, an analyst at Avian Securities in Boston. He has a neutral rating on the shares. “Everyone’s waiting for the Pre.”

Standard & Poor’s cut Palm’s credit rating to CCC, eight levels below investment grade, from CCC+. Product development expenses remain high, even as sales decline, analyst Bruce Hyman said. Palm’s dwindling supply of cash is likely to lead to further rating downgrades in the next two quarters, he said.

Palm said yesterday it had cash and equivalents of $215 million to $220 million at the end of February, a “sufficient” amount. It plans to boost cash levels to combat the economic slowdown. The company is scheduled to report full third-quarter results March 19.

The company said it may raise money by selling some stock and warrants held by investor Elevation Partners LP. Palm said it’s entitled to retain any net profit from remarketing those securities.

Bigger Stake

Elevation, whose managing directors include U2 singer Bono and private-equity veteran Roger McNamee, agreed in December to pay $100 million to lift its stake in Palm to 39 percent from 25 percent.

Palm can sell up to 49 percent of the Series C preferred shares and warrants until March 31, according to the December agreement. Palm must then repay Elevation $3.25 a share, profiting from the difference between that and the sale price.

Consumers spent less on mobile devices last quarter as they attempted to cope with the “challenging economic environment,” Palm said. The U.S. economy shrank at a 6.2 percent annual pace in the period, the worst performance in more than a quarter of a century.

Delivery of the Pre is still set for the first half of this year, “but as expected we’ve got a difficult transition period to work through,” Chief Executive Officer Ed Colligan said in yesterday’s statement.

To contact the reporter on this story: Hugo Miller in Toronto at hugomiller@bloomberg.net

Last Updated: March 4, 2009 16:42 EST