Leopard Strategy - Siyu's Hybrid Stock Pick

Saturday, December 09, 2006

Palm - Part II

This is the second part of Palm (PALM) analysis. Note that during the week, I bought another 1/2 unit Palm (PALM) at $14.40. (I vote with my money)

Financial
Closed at $14.54 on Friday, Palm is a 1.5B market cap company. Looking into its balance sheet, it has a good solid 760Million assets, including 500+M cash or cash equivalent and 260M deferred long term assets, which is the operating loss that could be carried over to offset future capital gain tax - this is like cash as long as the company has operating profit and need to pay tax! If we include other assets (goodwill, property, receiveable, etc) and liability (debts and payable, etc), the stock's book value is close to 1B.

Palm experienced steady revenue growth, and its revenue are 900M, 1.2B, and 1.5B in the last 3 years. Reading its recent quarterly report, while its profit margin in 2006 improved slightly compared to 2005, some subtle changes in the cost breakdown is very positive: R&D cost increases from 8.5% of total revenue in 2005 to 11.5% in 2006, while its operating cost reduces from 69% of total revenue in 2005 to 63% in 2006.

What does that mean? - Lower operating cost is a result of lower return rate and lower repair cost (meaning higher product quality!), while higher R&D cost goes to product development (translate to new product / solution!)

Others
I think Treo 700w - its first Windows mobile OS smartphone, is a strategically important move (Palm OS was their only platform choice before Treo700w), not only it balances its somewhat tense/tricky relationship with PalmSource (Palm OS provider), but also a necessary measure to diversify its bet on the technology trend (and let me tell you, when one bets on technology, betting with Microsoft is a much less risk business compared to betting against it)

Investment Theory
1. When I evaluate Palm at current price, we are paying (if we buy the whole company) 500 million premium (1.5Billion market cap minus 1Billion SOLID book value) for a company with 100 million net profit each year, PLUS 2 product lines (Treo Smartphone, and Palm handheld) with decent product recogonition, and market dominance in a global sense.

2. Enterprise solution (enterprise email, etc) is dominated by Research in Motion (RIMM) and has a higher profit margin compared to smartphone device, and that's the main reason why RIMM is so richly priced (P/E ~= 60, overvalued in my opinion). With Treo's shared dominance (with Blackberry) in smartphone, Palm has a reasonably decent shot in this area - though I couldn't find more specific information about it other than a few pages on Palm website , I think its increased R&D money may go to enterprise solution area, and if they have some moderate success in this area, its stock will go way up.

3. If Palm continues to maintain its market share in smartphone, and with some penetration in Enterprise Solution area, I evaluate it at 2B - 2.5B, about $19 to $24 per share in the next 12 months.

That completes my Palm analysis section II. In the end, let me ask you 2 questions.

1. If you were CEO of RIMM, would you consider buying Palm?
2. Any further info about Palm you would like to know? Leave your thoughts in the comment area, I may consider a Part III.

4 Comments:

  • I would try to buy Palm to penetrate the Consumer markets, diverisify beyond BB e-mail(which will face chalenges from MS Exchange server and linux e-mail servers & carriers own e-mail solutions) and access to Palm software engineers.

    RIM future is limited to the continuty of Carriers and IT managers to use BB e-mail.

    Why any one use an intermediate BB e-mail sertver (cost and complexity)when he now have the Exchange server service pack 2 push e-mail)

    By Anonymous Anonymous, at December 09, 2006 5:05 PM  

  • Siyu - your thougthts on RICK please. I bought after you gave a BUY signal.. but it seems to have gone down 10% even though they released good numbers? Will this bounce next year or sell and take loses?

    Sam

    By Anonymous Anonymous, at December 11, 2006 2:42 AM  

  • Sam:
    RICK today is as good as it was a few weeks ago when I recommended(so better value today!). I placed another BUY order (not executed) at around $5.60 today, expect to buy some more this week at this price.

    mygift(stephen):
    if you are not confident / comfortable with their products, the sell PUT is a good alternative and safe bet. But, given the option price, I guess it would be a very small bet though.

    Anonymous 1: thanks for the comments.

    By Blogger Siyu LI, at December 11, 2006 9:31 PM  

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