On Thursday, Palm Inc (PALM) reported results for the quarter that ended in February that were quite a disappointment to the market and one analyst in particular.  Excluding one-time charges the mobile handset maker lost $102.8 mln or $.61 cents per share, which was much wider than the $.42 cents expected by Wall Street.  The company reported unit shipments increased to 960,000, but sales did not follow through, selling only 408,000 units.  Net shipments drove revenue to come in at $350 mln, much better than Palm’s own guided range of $285 mln to $310 mln.  Clearly, this situation creates an excess inventory issue, especially in an environment where sales dropped 29% from the past quarter.  These inventory concerns have caused quite a few analysts to lower sales expectation for the next quarter.

The last quarter showed that Palm has fallen further behind the likes of RIM’s Blackberry or Apple’s iPhone in market share, and with strong emerging competition from Motorola and Google to name a few, the outlook appears fairly bleak.  The fact that Palm lacks a defining strength of the others is one serious cause for concern.  With 8.7 mln iPhones sold in the last quarter alone, Apple (AAPL) has a firm grip on the consumer market, and Blackberry (RIMM) continues to be the dominant player in enterprise market.  Motorola (MOT) has struggled over the last few years, but has a very wide range of handset products available and is making a strong push into smartphones.  And well, Google (GOOG) is Google, and the Nexus One is simply a cog in their massive operation.  Palm has a critically acclaimed WebOS and interface that it can hang its hat on, but the sales have been lackluster and are tailing off rapidly.

The analysts at Canaccord Adams have heard enough and actually lowered their price target on Palm from $4 to $0, and clearly have a Sell rating on shares.  In a note, technology analyst Peter Misek supported his bearish case,

“We believe Palm’s troubles will only accelerate as carriers and suppliers increasingly question the company’s solvency and withdraw their support…With what appears to be roughly 12 months of cash on hand, an accelerating burn rate, a complete lack of earnings visibility, and substantial debt and preferred equity, we no longer see any value in the company’s common equity.”

At Ockham, we have not been high on Palm for sometime either, and we were taken aback by the stock’s meteoric rise without strong fundamentals at all.  The stock became a darling of Wall Street on the hope that it had the next iPhone, or better yet, the perfect mix of business and pleasure in a smartphone.  The stock was a momentum play, pure and simple.  Sales have shown that the demand has not matched expectations, and we recently downgraded Palm to Overvalued from Fairly Valued a few weeks ago.  The stock is down 31% since our downgrade, but 27% of that has come today following the weak earnings and analyst reactions.  We are not as dire as Canaccord in our analysis or Palm though, because at some point we think the intellectual property may become attractive to another mobile phone company.  However, we would not be surprised if Palm continues lower before any potential buyers begin to show interest, especially as sales and earnings remain weak and the burn rate accelerates.

Blackberry maker Research in Motion (RIMM) co-CEO Mike Lazaridis was interviewed today after presenting a new Blackberry browser, applications and server in Barcelona at Mobile World Congress.  He pulled no punches about the looming bandwidth shortage that could soon befall wireless network carriers particularly in the US, such as AT&T (T), Sprint (S) and Verizon (VZ).  Consumers have quickly adopted mobile connectivity to the Internet through smart phones and netbooks, and wireless carriers have been all too happy to sign them up for a data plan.  However, the demand for bandwidth has grown recently far faster than the network providers can expand their coverage.  The immense popularity of smart phones like Blackberries, Apple’s (AAPL) iPhone, and Motorola’s (MOT) Droid is already putting a strain on the networks which results in dropped calls, non-functioning applications and other undesirable outcomes.

Clearly, Mr. Lazaridis does not point this fact out just because he thought it would be interesting conversation; he wants to relay the message that RIMM’s Blackberries have been found to be better stewards of the networks they run on.  He quoted a report out of Rysavy Research that Blackberries are three times more efficient when it comes to web browsing.  Furthermore, RIMM’s exchange server, which it routes all emails and attachments through, has been found to be five times more efficient for the carrier’s network.

We think his hope is that the major carriers will begin to encourage customers to use Blackberries rather than iPhones and other data intensive phones.  The clearest way that carriers could influence consumer behavior is through greater subsidies for phones that use less bandwidth.  It is apparent that as of right now, the retail consumer does not care about network efficiency and is more likely to get an iPhone than a Blackberry because they are seen as more multifunctional and fun.  However, Lazaridis hopes that he’s argument might persuade carriers to level the playing field, so to speak.

This is a problem that industry analysts have seen coming for quite some time.  Carriers are trying to build up their networks, but by the looks of it they cannot match the new needs.  This problem does seem to be intensifying, as some analysts estimate that smart phones could double market share from about 25% now to about half in a matter of a few years.  Some possible beneficiaries of this trend would be cell phone tower companies like American Tower (AMT) and Crown Castle International (CCI).  Another tech stock to keep an eye on is Tellabs (TLAB), which helps network providers manage the demands through a variety of solutions.

Revenue at Motorola (MOT) in the fiscal fourth quarter came in well below expectations as the new Droid failed to stop the bleeding for the world’s former number one cell phone maker.  Analysts were expecting to see sales of $5.96 billion in the quarter, but actual results come in well below that at $5.7 billion a nearly 20% decline from a year ago.  Revenue from the sales of mobile phones actually dropped at a faster rate, falling 22% and bringing in just $1.8 billion.  The company shipped about 12 million phones (2 mil were smart phones) compared to 19.2 million last year.  They were able to top EPS expectations of 8 cents per share by one penny, when excluding one-time charges.  Clearly, cost-cutting was the key reason why Motorola was able to best Wall Street’s earnings expectations, and the market is selling off shares by 11% in morning trading.

Perhaps even more important than the reduced sales in the last quarter was Motorola’s weak outlook for the quarter ahead.  They forecast a loss of between 1 and 3 cents, and consensus estimates had predicted a 3 cent per share profit.  Co-CEO Sanjay Jha defended the outlook by saying that they were still in the midst of a transition in their handset division towards becoming a smart-phone maker, instead of a basic mobile phone company.  This transition will take time, and the company said they are still going “full steam ahead” with plans to spin out the handset division but the timing on such a move is still very much in the air two years after announcing intentions for the split.  They did say that they expect the handset division to be profitable by the fourth quarter of this year.

It is clear that Motorola is in the midst of a transitional phase as it recreates itself as a smart-phone maker.  The first quarter of sales for the Droid was fairly successful but the rest of the company’s offerings dragged down results.  Motorola has leveraged itself to the Google (GOOG) Android operating system for their phones, as a key to turning around the company.  Motorola plans to unveil about 20 new versions of 3G smart-phones globally this fiscal year, and surely most if not all of them will be wired with Android.  It remains to be seen if any of these devices will achieve great results, and from our point of view the smart phone market is all about producing a quality, must-have phone rather than a great number of so-so options.  The Droid and the Cliq were able to sell 2 million units in their first quarter, so MOT hopes filling out their sales offering will have similar success.

The other divisions of Motorola actually produces about two-thirds of revenue, but both of these divisions saw revenue decline in the quarter as well.  Home and network division (set-top receivers for televisions) saw sales decline 24% to $2 billion in the quarter.  The enterprise mobility unit (walkie-talkie) actually dropped the least of the three divisions, only 12% to $2 billion.

At Ockham, we have viewed MOT as Overvalued since early October when the stock got into the mid-$8 range.  We continue to have a negative valuation stance on the company as of this week’s report because the sales have continued (and even accelerated) their three year slide, and current cash earnings simply do not support the price level.  The management team is trying to right the ship by focusing on smart-phones but they are already playing catch up in a field that has intense competition. 

The initial results from the new strategy have seen a decent response, but phones often sell well soon after their launch.  There are much more attractive stocks for value investors looking to ride the smart-phone wave.  For those looking for ideas, we have written on a few occasions that Research in Motion (RIMM) is attractively valued based on current fundamentals.

By now, we have all heard the reasons why Research in Motion (RIMM) is doomed and their stock is overvalued.  For starters, Blackberries are facing an ever growing number of strong competitors from the iPhone (AAPL), the Pre (PALM), and now the Droid (MOT) among others.  Not to mention, RIM’s biggest market of enterprise customers have been shedding employees rather than hiring, and the consumer market has never been RIM’s strength.  The average unit selling prices of Blackberries have tailed off significantly in recent quarters, and that will eventually dampen their profit margins.  While each of these reasons is widely known and there are surely more bearish arguments not listed, Research in Motion is not yet prepared to wilt to the conventional wisdom.

Research in Motion reported fiscal third quarter results after the close on Thursday and the company easily beat analysts’ estimates and offered up improved guidance.  Analysts were anticipating earnings per share of $1.04 on revenue of $3.78 billion, but in actuality the company earned $1.10 on sales of $3.92 billion.  In the last quarter, RIM shipped 10.1 million Blackberries and had a net subscriber gain of 4.4 million.  Growth in the quarter was impressive and the stock is soaring more than 12% in after hours.

Furthermore, RIM’s management was optimistic going into the final quarter of their fiscal year saying they are seeing a strong beginning to the holiday buying season.  They are anticipating 4.4 million to 4.7 million subscriber growth which will lead to sales of $4.2-$4.4 billion and EPS in the range of $1.23 to $1.31.  Also, they see margin expanding significantly to 43.5% from 42.7% in this quarter.  If RIM is able to achieve anywhere near the growth that they have projected in the quarter, they will finish the year with well over 40 million subscribers worldwide.  Clearly, this is what CEO Jim Balsillie was talking about when he referred to his firms "land grab" strategy in previous quarters, and it has not adversely impacted profitability as so many analysts had feared.

The negative sentiment swirling around Research in Motion had brought the stock very much out of favor with the market.  RIM has woefully underperformed the competitors mentioned earlier over virtually any timeframe in the past year.  At Ockham, we continue to believe that RIM is Undervalued, and even after the run-up in after hours it presents an attractive opportunity to investors.  RIMM continues to trade at a price level that places price-to-sales and price-to-cash earning levels below what the market has historically been willing to pay.

Surely, some who read this will fall back on the same arguments that have kept this stock depressed for some time, and it is their right to come to their own conclusion.  However, I would remind them of the words as a wise man once told me, "Conventional wisdom is an oxymoron."

“I thought the downgrade should have been made 20 points ago. You’ve got a 14 times earnings stock in the 50s. I’m not going to back away from it at this level. I’d rather buy it than sell it. It’s really down a lot.” — CNBC’s Mad Money 11/2/2009

Not much has been going right for Research in Motion (RIMM) investors recently with the stock about 33% in just under 6 weeks time.  The most recent sell-off was sparked by a downgrade to “Sell” from Citi (C) analyst Jim Suva related to stiffening competition particularly from smart phones running on Google’s (GOOG) Android operating system.  The stock was down about 6% on Monday mainly due to this downgrade news.

We have to agree with Cramer’s assessment above that the downgrade is probably too late as the stock has fallen hard already on concerns over increased competition.  Research in Motion has dropped considerable even as earnings have continued to increase significantly over the last few quarters.  So, relative to a market that has seen substantial P/E expansion, RIMM has seen its multiple contract.  This is an interesting phenomenon especially considering RIM operates in a particularly hot sector of smart phones where most other stocks have enjoyed a very nice run over the past few months.  For example, over the last six months Research in Motion has fallen 21%, whereas competitors like Apple (AAPL) has increased 48% and Motorola (MOT) is up 64%.  Even Palm (PALM) which is expected to make a profit until fiscal 2011 is just about even over the past half year.

This seems to us to be a perfect example that has fallen deep out of favor with the market, and in most cases we see that as an opportunity to value investors.  The stock has continued to drop as the fundamentals have strengthened; a fact that we believe the market will eventually take into account.  Not surprisingly, we have RIMM rated Undervalued and if the price falls any further it may be an upgrade to Greatly Undervalued in next week’s rating review.  For an example of just how undervalued Research in Motion is, we looked at the past eight years of price-to-sales for RIMM and it has normally traded within the wide range of 3.7x to 12.1x revenue per share.  That metric now sits at only 2.04x, which is incredible for a company that is expected to grow revenue at 34% this fiscal year and 23% in the next.

Cramer is correct that this is a stock that investors should more readily buy than sell.  The Citi downgrade was piling on with the bad news and the resultant drop should be viewed as an opportunity.