This article is a reprint of my 7 August 2008 RealMoney column.

Crown Holdings CCK - Annual Report) looks to me like the type of boring stock Peter Lynch would love. The company’s primary products include steel and aluminum cans for food, beverage, household and other consumer products and metal caps and closures.

Cans and bottle caps certainly don’t sound particularly glamorous. A glance at the recent producer price index report, however, shows that this industry has been steadily gaining pricing power over the last several years.

Year/Year Change in PPI Index for Fruit and Vegetable Canning Industry

Click here for larger image.

Source: Bureau of Labor Statistics

You may be surprised by how much innovation actually occurs in the business. The company highlights its research and development activities, including the SuperEnd beverage can end, which requires less metal than existing ends without any reduction in strength, and value-added shaped beverage, food and aerosol cans, such as Heineken’s keg can. Innovative products and strong industry pricing showed through when the company reported second-quarter earnings on July 17. Analysts were expecting the company to earn 55 cents per share. The actual earnings came in at 61 cents because of both higher volumes and stronger pricing. A particular strong area was the company’s European operations.

Growth in a Plain Metal Can

Wachovia Capital Markets analyst Ghansham Panjabi said second-quarter results reflect “torrid growth” in Crown’s European beverage can business. I suspect that if you asked 100 investors at random to describe Crown’s business, “torrid” would not be a common response. Of course, that is the point. Everyone knows that Apple (AAPL) , for example, is experiencing torrid growth. And they are paying up for it. With Crown, you find strong momentum while the stock is still flying under the radar of most investors.

The company is expecting more of the same. As recently as April, the company expected segment income of $750 million to $780 million. It now expects $800 million to $820 million for the full year. Analysts raised their earnings per share estimates to $1.68 this year and $1.98 next year, up from the prior levels of $1.61 and 1.93, respectively.

A Further Indicator

Better still, this year’s earnings-per-share growth is hampered by a higher tax rate stemming from the reversal of a deferred tax valuation allowance late last year. Companies must take such an allowance when it is “more likely than not” that future net income will be insufficient to use deferred tax credits before they expire. Reversing such an allowance is a signal that management expects future profits to be better than previously thought. Further, until the tax rate is normalized the underlying earnings growth is understated. On an apples-to-apples tax basis, earnings per share would have grown 36% in the first six months of 2008 — twice the reported growth rate. The company also increased its free cash flow guidance, even after boosting planned capital expenditures. It now expects free cash flow to be in the range of $350 million to $390 million after capital expenditure of $185 million.

At the midpoint of its free cash flow guidance, Crown is yielding 8.3% of its market capitalization — a solid premium over the yield on five-year Treasuries. At 14 times the 2009 consensus estimate (at the very low end of the company’s five-year P/E range), it is hard to argue that investors have priced in significant growth.

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

My latest column is up at RealMoney.

According to a release from the Bureau of Labor Statistics, core producer prices increased by 0.4% in April and 3% over the last 12 months. The monthly gain was twice the rate that had been forecast, and the 12-month change was the largest gain since December 1991.

I’ll leave reading the economic tea leaves to those who are better at it. For a stock picker like me, government economic reports can do more than just indicate the state of the economy. Instead, I like to examine the industry-level data to see if there are specific industries to consider more closely as investment opportunities. As usual, this month’s PPI report did not disappoint.

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

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).

Small Cap Watch List (Track at Marketocracy) member Silgan Holdings (SLGN - Annual Report) says in their latest 10K:

We are the largest manufacturer of metal food containers in North America, with a unit volume market share for the year ended December 31, 2006 of approximately half of the market in the United States, a leading manufacturer of plastic containers in North America for a variety of markets, including the personal care, health care, household and industrial chemical and pet care markets, and a leading worldwide manufacturer of metal, composite and plastic vacuum closures for food and beverage products.

It is often nice to find a small cap company with a dominant market share in its niche. It is even nicer when that niche is doing well. Today’s PPI report shows that the recent trend of strong pricing power in the canning industry continues. In fact, the chart is rather impressive.

Not only is pricing power near the high end of the 10-year range, it is in a general rising trend. The only concern is whether that bend at the end is just a bend or whether it is the start of a new trend. Whatever the case, though, this chart bodes well for Silgan’s earnings report tomorrow.

This trend should also be good for Silgan’s competitors, which include Ball Corporation (BLL), Crown Holdings CCK - Annual Report), Rexam (REXMY) and Constar International (CNST).