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The Day Ahead: End of Palm's quiet period should cheer investors

If Palm shares don't move soon, the picture will be grim for investors
Written by Larry Dignan, Contributor on

Palm's 25-day IPO quiet period ends on Monday. For investors that bought into hype-driven shares on the first day of trading, Palm can't start talking soon enough.

It's been a rough quiet period for Palm shares. Anyone that bought shares amid all the first-day IPO hoopla is seriously underwater. Some poor investors bought Palm at its first-day peak of 165. If you're in that sorry situation, your only hope is that Wall Street starts yapping about Palm in a big way to push shares higher.

Early next week, your luck may change for the better. Expect "buys", or equivalent ratings, from Goldman Sachs, Morgan Stanley Dean Witter, Merrill Lynch and Robertson Stephens. How do we know this? All four of the blue-chip brokerages were underwriters for the Palm IPO. They are paid to say good things.

The "underwriter starting coverage" trick is one of the oldest Wall Street tools, but it occasionally works. The real focus, however, will be on Palm earnings. Palm will report its third quarter earnings on Tuesday. The conference call will be available on the Web, and investors can get a first glimpse of Palm's management in action.

A First Call consensus poll of one analyst predicts a profit of 2 cents (1p) a share.

If Palm shares don't move in the beginning of next week, it could be a grim picture for investors. There are three potential catalysts for the stock -- underwriter kudos, earnings and the outlook for future Palm quarters.

Fundamentally, there's nothing wrong with Palm. The company makes money, is a market leader and is the closest thing there is to a handheld operating system standard. Unfortunately, Palm is a victim of its own IPO hype -- it couldn't possibly live up to the lofty expectations, especially with a hefty 23 million shares on the market.

But things are already looking up. Palm shares jumped 13 percent on Thursday after Bear Stearns analyst Andrew Neff started coverage of Palm with a "buy" rating and a price target of $80 (£49). Bear Stearns doesn't have underwriting ties to Palm.

In a research note, Neff said he believes there's huge demand among both consumers and professionals for mobile information appliances. Palm is the information appliance leader with partnerships with Nokia, Motorola, America Online (AOL) and Yahoo!. Neff reckons Palm can boost earnings with wireless Internet access fees and higher margin Palm OS licensing royalties.

ABN Amro is another brokerage that picked up coverage of Palm before its underwriters could. The company, which doesn't have underwriting ties to Palm, raised its earnings estimates this week and reiterated a "buy" rating on the stock.

Bear Stearns and ABN Amro are doing their own homework based on 3Com's latest quarter. The fact that they are starting coverage early on Palm without management guidance says a lot. ABM Amro analyst Jonathan Ross said Palm's third quarter sales were $272m (£168m), up from his estimate $226m (£140m). Operating income was estimated at $30m (£18m) before expenses, up from ABN Amro's estimate of $15m (£9.3m).

On Palm's first day of trading, Ross said, "We believe Palm could become a $50bn (£31bn) company in six months. This represents 42 times calendar year 2000 revenues."

Palm has a little less than $20bn (£12.4bn) of market capitalisation to go before it hits Ross' target.

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