Smartphone pioneer Palm (Nasdaq: PALM) has been stumbling lately, as you can see from the latest numbers. But there's a fresh third-quarter report coming on Thursday night. Is the company getting a grip, or are we being gladhanded? Let's see how we can handle this situation.

What Fools say:
Here's how Palm's CAPS rating stacks up against some of its peers and competitors:

Market Cap (millions)

Trailing P/E Ratio

CAPS Rating (out of 5) 

Nokia (NYSE: NOK)

$119,150

10.8

****

Apple (Nasdaq: AAPL)

$116,780

29.2

****

Research In Motion (Nasdaq: RIMM)

$58,690

56.0

**

Motorola (NYSE: MOT)

$21,800

N/A

**

Palm

$529

31.1

*

Data taken from Motley Fool CAPS on 03/18/2008.

This is the smallest and the least-loved company in the handset business. The CAPS bulls generally love Palm's products, and several of them think it's simply time for this stock to rise again. The bears point to increased competition from the likes of Apple, Samsung, and Taiwanese phone maker HTC. Even after a 46% price drop in the past year, several players still think that the stock is too expensive.

What management does:
Palm may have lost its mojo, but the company is not about to die entirely. There are still healthy free cash flows under the surface, and the selling margins have remained stable even as the bottom line faltered.

Margins

8/2006

11/2006

2/2007

5/2007

8/2007

11/2007

Gross

34.4%

35.7%

36.6%

36.9%

36.4%

35.1%

Operating

8.5%

7.5%

6.6%

4.7%

3.1%

(0.1%)

Net

21%

5.6%

4.4%

3.6%

2.5%

1.1%

FCF/Revenue

5.7%

5.4%

4.8%

9.2%

9%

7%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Expect the trailing cash flow margins to drop precipitously after this report, though. Palm had a negative free cash flow of $20.8 million last quarter, and is up against a particularly tough year-ago comparison this time: Free cash flow stood at $78 million four quarters ago.

To stem the red tide, Palm released the funky little Centro handset. The feature-packed but low-cost phone could make Palm's sales respectable once again, though you have to wonder what it'll do to the margins. The good old Treo commands a higher price, and the company has to live with the good and the bad of its strategy shift.

The key question this time, then, is whether the gross profit shrinks or grows compared to last quarter's paltry $103.8 million. Will Palm make up for lost margins through higher volume? Stay tuned.

Wave goodbye in style:

Palm and Apple are Motley Fool Stock Advisor recommendations. Learn why with a free 30-day trial subscription to our flagship newsletter service. Or just sign up for a free CAPS account to find the identities of your fellow Fools who were quoted above. They might have more to tell you!

Fool contributor Anders Bylund holds no position in any of the companies discussed here. He does have a shiny new HTC phone, though. You can check out Anders' holdings if you like, and Foolish disclosure is the Punxsutawney Phil of financial forecasting.