Palm Rallies, Despite Lower Earnings

Buyers emerged after the company announced a stock buyback plan and expressed confidence in new products

Palm (PALM) shares surged on Sept. 22 despite news of weaker earnings during the three month period ended Aug. 31. Investors seemed to cheer the company's stock buyback plan and new products, even though the mobile computing company is battling rivals Motorola (MOT) and Research in Motion (RIMM).

Palm reported earnings per share of 16 cents during the quarter, down from 18 cents during the same period of 2005. (This quarter was the first in which the company implemented new accounting rules for stock options expensing.) The Sunnyvale, Calif. company also announced a buyback program of up to $250 million of its common stock.

"We executed well on a number of fronts, significantly increasing profits and Treo sell-through," said Ed Colligan, Palm president and chief executive officer, in a Sept. 21 press release. "The product announcements we made this month put us in an even better position to meet marketplace demands and extend our worldwide reach."

The stock jumped more than 5% to $15.24 on the NASDAQ.

Nonetheless, the earnings results underscored Palm's challenges fighting for market share this year, after Research in Motion introduced its own handset the BlackBerry Pearl and Motorola its superslim Q e-mail gadgets. Palm had already warned the market about its weaker than expected first quarter Treo handset sales on Sept. 7, and the day after Palm's shares tumbled 8% to $14.30.

"We think competing smartphone entries are pressuring growth," Standard & Poor's equity analyst Zaineb Bokhari said in a research note Sept. 22. Palm expects its November-quarter revenue to be in the range of $430 million to $450 million; this is $50 million below her forecast. She bumped her opinion on Palm down to hold from buy and cut her 12-month target price on the stock by a dollar to $17.

Bokhari now thinks the company will have $1.7 billion in revenue during the year ended May 2007, instead of the $1.8 billion she had previously anticipated.

That wasn't the only downgrade. Bear Stearns analyst Andrew Neff lowered his rating on the stock to underperform from peer perform, noting Palm's competition and lowered outlook. But Neff added that Palm's new product launches may enable it to reverse recent trends.

In an attempt to grow its presence outside the U.S., Palm recently introduced the Windows Mobile-based Treo 750v Smartphone for customers of Vodafone Group, Europe's largest carrier.

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