Investors Hold Palm Steady

The smartphone maker's shares are up a day after strong earnings, despite two downgrades.
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A day after smartphone maker

Palm

(PALM)

posted

solid third-quarter results, it faced downgrades from two brokerages on fears that speculation over a possible buyout has skewed the stock's valuation and made it difficult to justify the current price levels.

Despite the Treo maker's strong results, UBS cut its rating on the stock from neutral to reduce, while Bank of America downgraded Palm from buy to neutral.

Investors, however, continued to hold onto the stock in hopes of a buyout.

Shares of Palm were up 30 cents, or 1.7%, to $18.04 midday Friday.

The stock had run up nearly 20% in the 30 days before

Motorola

(MOT)

issued an

unexpected earnings warning Wednesday. Motorola was rumored

to be the leading suitor for Palm.

In its postearnings conference call, Palm declined to comment on the chatter that the company is in play, characterizing the talk as "rumor and speculation." But the buzz has indeed been a significant driver for the stock price in the last month.

Palm could continue to face daily volatility, but it's likely to trade within the range of $17 to $20 a share, at least for a few more weeks, says Lawrence Harris, an analyst with Oppenheimer who has a neutral rating on the stock. Oppenheimer does not have an investment banking relationship with Palm, and Harris does not own shares.

"Whether the company is sold or not is always a fairly large swing factor," says Harris. "For Palm stock, recurrent speculation about a sale is important because it has a material impact on the stock price."

Takeover speculation will continue to be the biggest factor in Palm's stock movement, agrees James Faucette, an analyst with Pacific Crest, which makes a market in Palm shares.

Palm's valuation level is near that of rival

Research In Motion

(RIMM)

on an out-year P/E basis -- a surprising factor considering that RIM's profit was up

nearly 46% last quarter and the company has always posted strong results.

In contrast, Sunnyvale, Calif.-based Palm saw profit fall 61% in its third-quarter, but the company still

beat analysts' estimates and offered guidance for the fourth quarter that was in line with expectations.

Gross margins exceeded expectations; Treo shipments and sell-through were strong, though there was some weakness in the handhelds segment, said Tim Long, an analyst with Bank of America, in a research report. Bank of America has an investment banking relationship with Palm but does not own shares.

The company's analyst meeting on April 10 could help swing investor sentiment. Palm has already indicated that it has new product launches planned, including a possible new line of business that it has, so far, been extremely secretive about.