Judging from the reactions within the mainstream press -- and yes, the 20% jump in stock price -- it seems that investors were pleasantly surprised by Motorola's (NYSE:MOT) second-quarter news. So Motorola investors, sit back, bask in the news, and enjoy a cool beverage on this hot summer day. You deserve it. But once you're done, brace yourself, because I'm going to toss a glass of ice-cold water on the optimism.

Basking first

  • Q2 sales amounted to $8.1 billion, down 7%. (Wait for it ...)
  • However, Motorola cut the cost of these sales, adding 70 basis points to its gross margin (28.8%). That's barely half as good as Research In Motion (NASDAQ:RIMM) managed, but not too far behind Nokia (NYSE:NOK), Apple (NASDAQ:AAPL), or Ericsson (NASDAQ:ERIC) -- and about the same as Palm (NASDAQ:PALM).
  • Motorola moved more than 28 million cellphones in Q2, helping to maintain its No. 1 position in U.S. market share and its No. 3 slot worldwide.
  • The company began shipping a new "MOTOZINE ZN5" video-oriented cell phone, developed in collaboration with Kodak (NYSE:EK).
  • And it promised to introduce nearly three dozen more cell-phone models in the second half and more than four dozen next year.

Motorola's most dramatic improvements showed up on its cash flow statement. You no doubt remember how miserable the first-quarter numbers looked there. As I wrote at the time, "Free cash flow for the first quarter of 2008 came to negative $454 million, a sickening drop from the mere $84 million that Motorola burnt in Q1 of last year."

But Motorola made great strides in Q2. It slashed 9% from its inventory glut and generated $84 million in free cash flow. Sure, that still leaves the company in the red with $370 million in the first half of 2008, but it's moving in the right direction.

And now the drenching
Still, forget the pain of Q1. Consider an optimistic scenario in which Q2 proves the new norm for Motorola, which now proceeds to turn in three more quarters of similarly good news. What would Motorola's valuation look like then? Well, run $84 million in free cash flow out for four quarters, and Motorola would have about $336 million in free cash flow. At today's nearly $20 billion market cap, that makes for a price-to-free cash flow ratio of 59.

Does anyone really think Motorola's worth that much?

Seriously. That's not a rhetorical question. If you think there's value to be found in Motorola's stock, we'd like to know why. Come on over to Motley Fool CAPS and tell us. And Mr. Icahn? You're welcome to chime in, too.

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Fool contributor Rich Smith owns no shares of any company named above. The Motley Fool has a disclosure policy.