My latest column is up at RealMoney. It is a bullish piece about Reliance Steel (RS - Annual Report).

Prices for sheet metal work have been rising, and the durable goods orders show a rising trend.

Over the last 12 months, free cash flow (cash flow from operations less capital expenditures) has come in at $540 million, or 12.2% of Reliance’s current market capitalization. In 2007, it used $270 million to grow via acquisition and $82 million to repurchase shares. Even counting acquisitions as an alternative to capital expenditures, the free cash flow yield would be 6.1% — more than twice the current yield on five-year Treasuries. Modest growth from the acquisitions would allow for double-digit returns.

Reliance traded off somewhat when it reported earnings and guided to $1.50 to $1.60 per share in earnings for the June quarter. The consensus estimate prior to the report had been for $1.66, and it is currently $1.62. The guidance reflects uncertainty over demand and “flat to rising prices” and may thus prove conservative. Management was similarly uncertain when offering guidance for the recently reported quarter, and ended up beating estimates by 8 cents.

For the full year, earnings estimates continue to rise. Reliance is expected to earn $6.01 this year and $6.36 in 2009. Reliance’s nearest competitor, Worthington Industries (WOR) , is currently trading at 11.4 times forward earnings. At that multiple, Reliance shares could rise 20% to $72.50 over the next six to 18 months.

Disclosure: At time of publication, William Trent holds no financial position in the securities mentioned in this article.

A couple of weeks ago, I wrote on Celanese (CE) for RealMoney, saying it could rise 40% simply by earning the average P/E in its industry.

Today Celanese increased its full year outlook for adjusted earnings per share to between $3.60 and $3.85 from its previous guidance range of between $3.40 and $3.70.

As I noted when I first wrote up Celanese a couple of weeks ago, consensus had already risen to $3.74. Although the stock is up 7% since that recommendation, an industry-average P/E multiple on that number would equal a $60 price for the stock, 33% above the current level.

Since I was away at the time the original article was published and thus failed to link to it, I am reprinting it below.

I’ve been taking a look at chemical maker Celanese, and I have to say I like what I see. I think the shares could rise 44% over the next year simply by expanding its P/E ratio to the average for its industry.

Originally based in Germany, Celanese was incorporated in Delaware in 2005. However, it continues to generate a significant portion of its sales outside North America. In 2007 the company earned 29% of its $6.5 billion in revenue in North America, 43% to customers in Europe and Africa, and the remaining 28% in Asia and the rest of the world.

Celanese is an industry leader in acetyl products and high performance polymers used in a wide variety of industries. The company competes primarily with BASF, Dupont (DD), Eastman Chemical (EMN), Dow Chemical (DOW), Rohm & Haas (ROH), and Air Products (APD). Celanese claims to be the low-cost producer in the industry, an assertion backed by its industry-leading profit margin and return on equity.

Sales rose 12% in 2007 due to favorable currency effects and rising prices. The latter trend has, if anything, accelerated so far in 2008.

Year/Year Percentage Change in PPI for Chemicals

Source: Bureau of Labor Statistics

Celanese has also shown itself to be shrewd when it comes to financial matters. Last year it took advantage of the then-favorable credit market to refinance $2.5 billion of debt, reducing its effective interest rates from approximately 10% to 175 basis points over LIBOR. It also borrowed to repurchase 1.5% of its shares, paying what now appears to be a bargain price of $30.50 per share in a Dutch auction.

The company recently authorized, and began to implement, a $400 million share repurchase. Based on their track record, the repurchase may indicate shares remain a bargain.

As an early cycle recovery play, there is of course some risk that a call on Celanese is… well… early. But I see no point in waiting around for a company that has beaten earnings estimates handily quarter after quarter. In the December 2007 quarter, the $0.93 per share earned compared to estimates of just $0.81. Since then, estimates for 2008 have risen from $3.66 to $3.74, and estimates for 2009 have expanded from $3.61 to $3.91.

The ongoing earnings surprises, surprisingly, have not resulted in an excessive valuation. At 11 times current year earnings, the price compares favorably to the industry average of 15.7 times, as reported by Hemscott. Its free cash flow yield of 4.3% is not eye-popping, but compares favorably to the current yield on five-year Treasuries.

I also think the earnings at Celanese are of higher quality than those of its peers. In fact, its 0% accrual ratio indicates that there is essentially no distortion being caused by accounting accruals, compared to reporting earnings on a cash basis.

If Celanese were to trade at the average P/E multiple for its industry, its shares could rise to $60 over the next year. That would mark a gain of nearly 44% from current levels.

I think there is limited downside due to its already low valuation. There is also potential technical support at the 50-day and 200-day moving averages, both within 10% of the current share price.

Disclosure: At time of publication, William Trent has no position in the companies mentioned in this article.

My latest column is up at RealMoney.

I dissect the jobs report to see which industries are showing the best/worst growth in new hiring, on the thesis that companies in these industries may present investment opportunities.

The fastest growing industries are restaurants, hospitals, mine services, machinery, and oil & gas extraction. The worst were transportation equipment and a plethora of housing-related sectors.

Disclosure: At time of publication, William Trent owns shares of Starbucks (SBUX).

Disclosure: Author is long Starbucks (SBUX) at time of publication.

My latest post is up at RealMoney.

In it, I extend yesterday’s observations about the hidden strength in durable goods orders to specific industries that might benefit. Among those industries were primary metals, computers and electronic products, and motor vehicles and parts.

These industries may prove to be a good starting point for further research.

My latest column is up at RealMoney. Here is a summary:

Government economic reports can do more than just indicate the state of the economy. Since many of the reports include industry-level data, digging deeper in the reports can help investors find specific industries to consider more closely. For example, the Bureau of Labor Statistics, which prepares the PPI report, provides detailed information on an industry basis.

Since I wrote about the PPI data in September, the pricing power has shifted to some different industries. Therefore, I thought an update would be in order.

Some of the industries that look interesting are petroleum refineries, industrial gases, computers, computer storage devices, and line-haul railroads.

Disclosure: At time of publication, William Trent has no financial position in the companies mentioned.

This article is a reprint of my February 13, 2008 RealMoney column.

Late last year I used the government’s PPI data by industry to scout out 26 investment ideas, among which were industrial valve manufacturers Flowserve (FLS), Crane (CR) and Curtiss-Wright (CW - Annual Report). In October, I said Flowserve may be the best way to play the PPI report.

Since that column in October, Flowserve has gained more than 22.5%, while the S&P lost nearly 12%. Now the question is whether to let this winner ride or to take the money and run. For now, I think the answer is to keep on going with the Flowserve.

For one thing, they call them “industrial” valves for a reason – and that means there is likely limited exposure to a consumer slowdown. According to the most recent 10K, the company’s customer mix by end market is approximately 43% oil and gas, 23% general industrial, 15% chemical, 13% power generation and 6% water treatment. These are industries with long-term planning needs, many of which are finding themselves behind the curve. I don’t see them slowing their spending any time soon.

This is supported by the pricing power the industry continues to enjoy. Although off the 2007 peak in the double digits, the year/year change in January was still far above the industry’s long-term average and still indicating an overall rising trend.

12-month Percent Change in Industrial Valve Manufacturing Prices

Source: Bureau of Labor Statistics

The pricing power is also flowing through to earnings. Flowserve is set to announce earnings on February 27, but they preannounced in a big positive way at the end of January, which explains most of the stock’s run. Curtiss Wright shares, meanwhile, gained 7% on Tuesday when their earnings beat estimates by $0.09 per share “led by our Flow Control and Metal Treatment segments, which experienced strong organic growth of 23% and 15%, respectively, over the prior year periods.” Crane also walloped estimates when it reported last month.

All these positive estimate revisions caused Flowserve’s Zacks rank to jump up to 1, putting the company among the top 5% of all companies measured in terms of earnings momentum. According to Dan Fitzpatrick, as of last Friday the technicals supported a buy (with appropriate risk controls.)

As with most stock ideas, Flowserve has some downside risk – particularly with regard to valuation levels. In particular, its 1.8% free cash flow yield is below the yield on Treasuries – meaning that a good deal of the return must come from growth. There are several names that offer similar growth and higher free cash flow yields, particularly among the software companies I look at. Still, I think there could be benefit to owning Flowserve for diversification purposes.

Its 19x forward P/E ratio isn’t among the cheapest available, and is toward the high end of the 8x – 24x range at which Flowserve has traded over the last five years. Its price/book ratio is also significantly higher than those of its peers. I would not be at all surprised to see the valuation contract in the short term, and I am virtually certain it will contract in the longer term.

But taking the valuation ratios down to the five year average over the next five years would knock about 4-5% per year off the return, by my estimates. Given the 20% annual expected growth rate over that period, that still leaves room for annual returns of 15% or so, which I think will far outpace the S&P 500 over that time.

Disclosures: None

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Last month I showed how investors can generate investment ideas by using the Producer Price Index (PPI) report prepared monthly by the Bureau of Labor Statistics. The idea is that industries where prices are rising may contain companies where revenue will grow faster and/or margins will improve.

Of course, like any initial screen the PPI report is only a starting place. It is useful to generate ideas, but further research is needed to determine whether they are good ideas. This month, I do some of that further research.

One industry where the price increases have been flowing is industrial valves. Although the increases have been flattening out somewhat, the 8.3% year/year gain in September is still pretty sweet.

As I mentioned last month, some of the industrial valve makers include Flowserve (FLS), Crane (CR) and Curtiss Wright (CW - Annual Report). Let’s see how they are doing.

According to Flowserve, the PPI indicator is right on the money. Flowserve noted in its latest earnings report that its Flow Control Division’s “gross margin of 35.6% for the second quarter of 2007 was substantially higher than the second quarter of 2006, up 140 basis points. This increase was principally due to improved absorption on higher sales, the implementation of various Continuous Improvement Programs and cost reduction initiatives and improved pricing.” With sales up 13%, bookings up 15%, and pricing remaining strong it looks like the trends could continue for some time.

Crane is also doing well. Crane’s Fluid Handling segment saw a 13% gain in sales and a 30% increase in backlog in the latest quarter. However, “Margins remained at 12% reflecting more price competitive project work and investments in new products and systems to support future growth.” That “price competition” isn’t doing any damage yet, but it could. It may be especially important to watch the PPI reports on a continuing basis to find the right time to get out of a position before the eventual loss of pricing power is picked up in an earnings report three months later.

For Curtiss Wright’s Flow Control division, “Sales for the second quarter of 2007 were $163.2 million, up 26% over the comparable period last year due to solid organic growth and the contribution from the 2006 and 2007 acquisitions. Sales from the base businesses increased 14% in the second quarter of 2007 as compared to the prior year period.” Profitability declined primarily due to cost overruns on a Navy project, but the company noted that margins were also impacted by “labor inefficiencies, business consolidation costs, and higher material costs experienced within our oil and gas market.” The stock has rallied on strong results and increased guidance from its other divisions, however.

After taking a closer look at the three valve makers, I think Flowserve may be the best way to play the PPI report. For one thing, valves and related products make up a larger part of its revenue. As a purer play, the pricing information conveyed from valve PPI is more relevant. It’s true that the better performance has not gone unnoticed by the stock market, which has boosted FLS shares more than those of CW or CR in the last couple of years. However, based on the continued strong pricing environment it looks like that strong performance could be sustained.

Disclosure: Author is long UNITED STS OIL FD LP UNITS (USO) at time of publication.

The pricing strength indicated by the PPI report seems to have been validated by Silgan’s (SLGN - Annual Report) earnings report today.

“Net sales for the third quarter of 2007 were $904.8 million, an increase of $48.4 million, or 5.7 percent, as compared to $856.4 million for the same period in 2006. This increase was primarily attributable to higher average selling prices resulting from the pass through of inflation in raw material and other manufacturing costs and an improved mix of products sold in the metal food container business, the inclusion of sales from our fourth quarter 2006 and first quarter 2007 acquisitions, the impact of beneficial foreign exchange translation on international revenues and improved volumes across all businesses.”

This article was originally published at RealMoney on October 15, 2007.

Last month I showed how investors can generate investment ideas by using the Producer Price Index (PPI) report prepared monthly by the Bureau of Labor Statistics. The idea is that industries where prices are rising may contain companies where revenue will grow faster and/or margins will improve.

Of course, like any initial screen the PPI report is only a starting place. It is useful to generate ideas, but further research is needed to determine whether they are good ideas. This month, I do some of that further research.

The first industry I mentioned last month was fruit and vegetable canning. Year/year price increases for the industry have been well above average, and although they have come down a bit from a peak earlier this year the trend still appears to be upward and last month inflation ticked up to 5.5% from 5.3% in August.

Year/Year Price Increases for Fruit and Vegetable Canning Industry

Source: Bureau of Labor Statistics

As I noted last month, possible plays on this industry include packaging companies (can makers) such as Ball Corp. (BLL), Crown Holdings CCK - Annual Report) or Silgan (SLGN - Annual Report). Or you can go to the food processors such as Campbell Soup (CPB), Del Monte (DLM - Annual Report), Hain Celestial (HAIN) or H.J. Heinz (HNZ).

Let’s start with Ball. When Ball released second-quarter results, they said they would be increasing capital spending “related in part to 2008 capacity additions for Europe, where we are essentially sold out this year and next.” President and CEO R. David Hoover called the first six months of 2007 the best half-year in Ball Corporation’s 127-year history in terms of sales and earnings. The strong first half supports the initial PPI reading, and the continued strength in pricing power suggests more good news to come.

However, Crown Holdings noted in its earnings report that raw materials prices were also rising. Passing through cost increases benefits sales growth, but may not help profit margins. Crown may be more exposed than others in the industry, suggesting greater caution on the name and an eye on raw material costs if any investments are made.

Silgan also commented on raw material costs, but reports that the pass-through works on a lag. “Operating margin increased to 7.6 percent from 5.4 percent [due in part to] the lagged contractual pass through beginning in the latter part of 2006 of significant inflation in other manufacturing costs.” Silgan looks like a good bet, as the lag effect will mitigate the impact of future cost increases and also help margins even more the next time raw materials prices head south.                                                                    

Moving to the food processors, Campbell’s Soup said “Gross margin increased to 41.9 percent from 41.8 percent… primarily due to productivity gains and higher selling prices, partially offset by cost inflation.” Rising prices also contributed 2% of the 7% total sales growth for the year. With the stock not yet reflecting these results, investors may want to take a good look.

For Del Monte, however, the rising prices are hurting more than they are helping. “The Company now expects fiscal 2008 diluted EPS from continuing operations to be at the low end of its previous guidance of $0.70 to $0.74” due primarily to cost increases in excess of what it can pass through. Given the better apparent prospects from other names that passed the screen, it is hard to argue in favor of Del Monte.

No so for Hain, which reported “gross margin of 27.9% in the fourth quarter, compared to 26.5% in the prior year fourth quarter. Margin improvements achieved through productivity gains and price increases were offset by the challenges at Celestial Seasonings.” Hain has had a good year, though, suggesting that investors may have already picked up on the positive news.

Finally, Heinz increased its sales and earnings guidance, saying on the conference call that “We are seeing positive net pricing and productivity offset these cost headwinds.”

In conclusion, on further review the initial positive read from the PPI report seems to be confirmed in five out of seven cases. In a few of the cases (Ball, Silgan and Hain) the stock price has followed the pricing trends, which bode well for continued strong performance. For Campbell’s and Heinz, the stocks have been stuck in neutral and (pardon the pun) may be ready for one of Cramer’s “ketchup” plays.

Originally published at RealMoney on September 19, 2007.

Tony Crescenzi says the latest PPI report should be tossed because the benign headline reading will almost certainly be reversed in the months ahead owing to the surge in energy costs that has occurred of late. I say not so fast! If prices are rising, that means some companies out there are likely to see better profits. Before tossing out the report, I’m betting we can figure out who a few of them will be.

The Bureau of Labor Statistics, which prepares the PPI report, provides detailed information on an industry basis. The problem is figuring out how to find it on their web site. Starting at the PPI home page, I scroll down to the headline that says “Get Detailed PPI Statistics” then click on Industry Data. You can then pick out which industries you want to see (I pick ‘em all) and click “Retrieve Data.” Then I select “More Formatting Options” and click on the boxes for 12-month percent change, all years, and include graphs. Once I hit “retrieve data” again I have what I’m looking for - graphs that make it easy to tell which industries are gaining or losing their pricing power.

First up is the fruit and vegetable canning industry. At 5.3% year/year inflation, pricing is clearly better than normal. It is down from a recent peak but still looks to be generally in a rising trend.

Possible plays on this industry include can makers such as Ball Corp. (BLL), Crown Holdings CCK - Annual Report), or Silgan (SLGN - Annual Report). Or you can go to the food processors such as Campbell Soup (CPB), Del Monte (DLM - Annual Report), Hain Celestial (HAIN), or HJ Heinz (HNZ).

Looking better still are industrial valves, up 9.3% year/year against tough comparisons.

Some of the industrial valve makers include Flowserve (FLS), Crane (CR) and Curtiss Wright (CW - Annual Report).

But enough with boring “old” industries. How about tech? It is seldom that tech prices actually increase, but sometimes they decline at a slower than usual pace, which can provide a similar opportunity. That may be the case right now with computer storage devices.

Last month’s 2.9% decline from last year was the smallest price drop on record for this industry, and the ongoing consolidation may help the trend continue. Plenty of ways to play this one, including Brocade (BRCD), EMC (EMC - Annual Report), Iomega (IOM), Hutchinson (HTCH), Quantum (QTM), Sandisk (SNDK - Annual Report), Seagate (STX - Annual Report), and Western Digital (WDC).

By contrast, semiconductors are experiencing the worst pricing on record.

That could be the signal for a contrarian play (I happen to think the worst will soon be over for semiconductors) or possibly just an excuse to avoid the group for a while.

The PPI clued me in to the opportunity in railroads a year before Buffett bought in. I hestitate to bet against him, but it looks like the industry’s price increases have ground to a halt.

If you have the guts, I’d count this as bad news for Burlington Northern (BNI), CSX Corp. (CSX), Norfolk Southern (NSC), and Union Pacific (UNP).

Finally, Wired Telecommunications saw pricing decline for years after the 1996 Telecom Act, but recent consolidation is allowing them to raise prices again.

Winners here would be CenturyTel (CTL), AT&T (T - Annual Report), Verizon (VZ - Annual Report) and Embarq (EQ).

By my count, that is 26 potential stock tips, all courtesy of the U.S. government. I’ll take that over tossing the report any day.

Disclosure: Long Semiconductor HOLDRs (SMH).