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Investors Turn Thumbs Down on palmOne

A downgrade on the PDA maker triggers a slide of more than 20%.

Shares of



swooned after Bear Stearns downgraded the stock, saying shares were overpriced.

The stock shed $3.78, or 21.6%, to $13.72 in Thursday trading.

In a morning note, Bear said it had lowered its rating to underperform from peer perform. The bank had a peer perform rating on Palm before the company spun off its software division and merged with



on Tuesday. It hasn't done investment banking for palmOne.

"While the spinoff/merger makes sense and there could be some upside from Treo 600 and new products during the holiday season," wrote analyst Andy Neff, "the current stock level is difficult to justify given the number of challenges that PLMO faces, such as intensifying competition from Microsoft OS-based device vendors (




, and others)."

"Trading at 0.7 times our calendar year 2004 revenue estimate of $1.029 billion (

excluding excess cash), PLMO is trading at a multiple comparable to

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, Hewlett-Packard and

Sun Microsystems

, which does not seem warranted since Apple and H-P have stronger balance sheets, are profitable, and have attractive non-hardware businesses," he wrote.

Some would argue that with Treo 600, palmOne should enjoy a more robust valuation similar to that of handset vendors, Neff said. For example,


(NOK) - Get Report

trades at 2.5 sales,



trades at 1.2 times sales, and

Research In Motion


trades at 4.4 times sales excluding excess cash. But Neff said he disagrees given that "PLMO has a hardware centric business (80% to 90%

of sales from handhelds), lacks RIM's recurring revenue, lacks handset vendors' volume, and faces formidable entrenched competitors such as RIM and Nokia."

He expects palmOne to post sales of $275 million and EPS of 7 cents in the second quarter of fiscal year 2004, which ends this November. But he predicts losses for the company in both the current and upcoming fiscal years.

Neff projects that in fiscal year 2004 (which ends in May 2004), palmOne will show an EPS loss of 80 cents on revenue of $919 million, followed by another loss in fiscal year 2005 of 40 cents per share on revenue of $1.1 billion.