Late Tuesday, handheld computer giant Palm reported fourth-quarter results that topped estimates. Revenue was $165.3 million, above the company's estimate for between $140 million and $160 million. The company's pro forma loss, which excludes some hefty charges, was $89.2 million, or 16 cents per share. That's better than First Call's estimate for a loss of 19 cents a share.
But the company took more than $435 million in charges due to some inventory problems that resulted in huge write-offs of unsold products.
Analysts were willing to disregard the charges given Palms's good news about inventory, though; the company said it has pruned its channel inventory to about 10 weeks' worth of goods. Previously, it had at least a quarter's worth of products in its pipes. Furthermore, Palm plans to trim that down to four to eight weeks.
The news inspired upgrades for Palm and Handspring, both of which rose Wednesday. Palm closed up 83 cents, or 16 percent, to $6.02. And Handspring closed up 99 cents, or 18 percent, to $6.40.
"Palm may not be well yet, but the risk for the stock is decreasing," wrote U.S. Bancorp Piper Jaffray analyst William Crawford, who upgraded the stock to "buy" from "neutral."
Crawford said that though his revenue estimate is actually declining for fiscal 2002, the company's stock multiple can be expected to rise, given "the clearing of inventory and the improved cash outlook."
ABN AMRO analyst Robert Cihra also upgraded the stock--to "buy" from "add"--despite lowering his estimates for revenue in fiscal 2002. His estimate is for $1.5 billion, compared with First Call's consensus number of $1.47 billion. Cihra said his rating change was due to the company's improved inventory situation, and a belief that the company's next quarter would bring it to its goal of "lean inventories (four to eight weeks) and a fully refreshed product line-up."
But even the analysts who upgraded the stock admitted that 10 weeks of inventory was still high. There are also a few other concerns the company will have to clear up before other analysts hop on the upgrade bandwagon.
Merrill Lynch analyst Melanie Hollands was more cautious on the stock, maintaining her "neutral" rating and suggesting "near-term issues could distract management from addressing bigger-picture challenges. She said signs of progress on a turnaround plan, economic recovery, and a rebound in demand for handheld devices are all necessary before investors should consider getting back into the stock.
Competitor Handspring also got some upgrades based on Palm's improving inventory situation.
UBS Warburg analyst Don Young upgraded Handspring based on Palm's quarter. In a research report titled "The opportunity is at Hand," Young raised the company to a "buy" from a "hold," explaining that the company should follow its competitor with an improving inventory situation.
"Palm's reduction in channel inventories to 10 weeks of supply" is very good news for Handspring, Young wrote. "But Palm's intent to target a range of four to eight weeks of channel inventories is even more positive news," he added, as it signals a change in industry dynamics.
CIBC Oppenheimer analyst Thomas Sepenzis, who maintained his "buy" rating, said that Handspring's next quarter could have some positive surprises, given that Palm reports a May quarter, and Handspring reports a June quarter--therefore giving the company more time to accumulate the benefits of what can be assumed to be dwindling inventory.
The news that sales of handheld devices have picked up recently could "impact Handspring even more than Palm, and we may see some upside to the recently reduced estimates for the current Handspring quarter," Sepenzis wrote.
In its most recent forecast, Handspring said it expects fourth-quarter revenue between $60 million and $65 million, about half the $121.3 million it had originally forecast. First Call's estimate is for a loss of 32 cents a share.
U.S. Bancorp's Crawford was more cautious and kept the stock at a "neutral" rating, citing concerns about competition from Palm and Sony in the company's more expensive line of devices, and a lack of clear forecasts for some of its product sales. The analyst acknowledged that Palm's news about inventory clearing up would be a boost to Handspring shares, but said that, given the other concerns, investors should stick to the sidelines for now.