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Upgrade gives Palm shares a boost

Shares of the handheld maker surge after an analyst's upgrade, but not enough to recover from earlier losses.

Shares of Palm surged Monday as one analyst upgraded the stock and dubbed it a bargain.

Palm shares closed up 89 cents, or 18 percent, to $5.94.

The gains, however, were not enough for the handheld maker to recover the 28 percent it lost Friday after it warned of weak sales and faced a host of downgrades.

Palm warned on Thursday that revenue in its current quarter will come in between $140 million and $160 million, just half its forecast, which had already been drastically lowered. The company also called off its deal to acquire Extended Systems.

Despite the bad news, one analyst upped Palm to "strong buy" from "buy." UBS Warburg analyst Don Young said $5 a share is "a very appealing and defensive valuation for a company with great growth prospects and a strong intellectual-property position." He said the company's assets should be valued at about $11 a share.

"While investors are clearly disappointed in Palm's latest pre-release, we were not," Young wrote in a research note. The analyst said the company's aggressive move to purge excess inventory should put it in much better financial shape. He raised his fiscal 2002 estimate to a loss of 5 cents a share from a loss of 10 cents a share.

Although Young bucked the trend of downgrades, he did voice worries about Palm's cash position.

"The only issue in our mind is cash," Young said, referring to lingering questions about whether Palm is burning through its cash too quickly. Young said Palm's cash and real estate holdings will still be close to $500 million on June 1.

Other analysts had predicted Friday that the company could be down to around $300 million by the end of its fourth quarter.

Young also countered the argument that Handspring is in better shape than Palm. Though investors punished Handspring along with Palm Friday, most analysts said the company wasn't as bad off as Palm. Young said it's just the opposite.

"Palm's inventory overhang and pricing actions pose difficult obstacles for Handspring," Young wrote. Discounting of Palm's products appear to be hurting sales of Handspring's devices, and the company also has a problem with excess inventory and a valuation that is much richer than Palm's.

Young lowered his revenue estimate for Handspring's June quarter by 15 percent.