Will Nokia Buy PALM? That Wouldn’t Be Smart

Shares of PALM (PALM) surged to new highs today on strong volume. Optimism about the forthcoming secondary offering and rumors about a possible bid from Nokia (NOK) are the primary reasons. Also sitting on traders’ minds is talk of a paid app store launching on Thursday.

Unfortunately, a large amount of good news has already been priced into PALM. In fact, today’s rise reflects unwarranted optimism, not an improvement in the company’s business.

PALM has a negative book value of $740 million, meaning its liabilities far exceed its assets. The company continues to burn cash and lose money. (Hence, the need for a secondary offering.)

As far as the new operating system, current forecasts don’t suggest enough phones will be sold to support the current price. The Zacks Consensus Estimate calls for PALM to post a 37-cent loss in fiscal 2010. If we look out to fiscal 2011, analysts think the company could earn 57 cents per share. However, forecasts for both fiscal years have recently been cut.

And even if we assume the fiscal 2011 forecast is correct, PALM trades at a premium. The P/E of 30 is higher than what Apple (AAPL), Research in Motion (RIMM) or Nokia trade at. Considering that these 3 are more fundamentally-sound companies that have shown an ability to sustain profitability, why would someone pay a premium for a company that lacks an adequate cash balance?

Don’t get me wrong, I like the new webOS. I personally own a Pre and want to see PALM survive. However, I’m also very cognizant that there is a big difference between a good product and good stock. And the fundamentals show that PALM is not a good stock.

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