The iPhone is making far more cash for Apple than the Street generally believes, according to Societe Generale analyst Vicent Rech.

Due to the Apple's practice of amortizing iPhone revenue and costs over a 24-month period, there is a substantial difference between reported numbers and underlying cash generation, Rech wrote in a research note on Friday. However, most market participants including us have missed the dramatic impact of this specific accounting practice because it hides profitability trends, Rech asserted.

Rech contends that iPhone gross margin is already running at about 60%, compared to 33% for the rest of Apple's activities. He sees iPhone accounting for 28% of adjusted revenue in 2009, growing to more than 40% in 2012. Even if iPhone gross margin drops to 50%, he says, Apple's reported gross margin will rise from 36% in fiscal 2009 to 39% in 2012 due to a shift in product mix.

Even if Apple sells sold no iPhones after June 2009, he writes, assuming other activities produce a 33% gross margin, the reported margin would reach 37% in Q4, with 2010 still flat at 36% versus 2009. He notes that the Street consensus calls for flat gross margin in the 2009-2011 period, which he contends would imply a dramatic fall in Mac and iPod profitability.

The analyst sees the company producing adjusted EPS of $9.13 in the September 2009 fiscal year, $11.16 next year and a whopping $13.83 in fiscal 2011. On a reported basis, he expects $5.42 this year, $7.92 next year and $10.18 in FY 2011.

Rech on Friday raised his target price on the stock to $255, from $170.

The analyst also contends that the fat profitability of the iPhone gives the company substantial room to cut prices, a factor he says poses a risk for Nokia, which he already rates a Sell.

Apple on Friday was up $3.36, or 2.2%, to $170.21.