My latest column is up at RealMoney.

New orders for manufactured durable goods in May increased slightly to $213.6 billion, the U.S. Census Bureau announced last week. This was the first increase in three months, and it followed a 1.0% April decrease. Excluding transportation, new orders decreased 0.9%. Excluding defense, new orders decreased 0.6%.

Behind that bland summary, though, is usually a wealth of information that I believe could be useful for picking the best industries in which to invest. This month, the signal was clear. Get defensive. Among a sea of industries seeing declining sales and orders, one stood out for its strength: defense aircraft and parts.

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

This article was originally published at RealMoney on September 26, 2007.

My article last week about mining the PPI report for stock ideas was so well received I thought I’d share another of my favorite taxpayer-provided idea generators, the durable goods report. Published by the U.S. Census Bureau, the report has a similar breakdown by industry of durable goods orders, shipments, inventories and backlog.  I came away with 28 potential ideas for further research.

In line with much of the recent economic data, the headline durable goods number was weaker than expected. To quote from the report, “New orders for manufactured durable goods in August decreased $11.3 billion or 4.9 percent to $219.5 billion, the U.S. Census Bureau announced today…. Shipments of manufactured durable goods in August, down two of the last three months, decreased $3.4 billion or 1.6 percent to $216.7 billion.”

But in this case, I think focusing on the forest means you could miss out on some of the more attractive trees. I gathered the data from the Census Bureau and created charts showing the year/year change in durable goods statistics for a variety of industries hoping to find some areas worth further consideration. Keep in mind, this is an initial screen for idea generation, not a full-fledged analysis of any of the names. You wouldn’t want to buy the stocks listed here without further research. That caveat aside, let’s look at some of the better performing industries.

First up is technology – computers and electronic products. Although 3.3% order growth year/year and essentially flat shipments may not be the type of growth investors typically look for from tech, it is a clear improvement from recent months. Inventories are starting to be drawn down and backlog remains strong.

But there are areas of strength and weakness within tech. Specifically, computers (and related products) themselves are starting to look strong, with backlog headed through the roof and inventories in check.

The fairly obvious stock ideas from this industry include Apple (AAPL), IBM (IBM - Annual Report) and Hewlett Packard (HPQ - Annual Report). If things keep getting better (and the company figures out how to file its required regulatory reports) Dell (DELL) might even look interesting again. Stretching a bit further, Sun Microsystems (a href="http://stockmarketbeat.com/blog1/category/tech/sunw/">SUNW - Annual Report) and Lexmark (LXK) come to mind. And don’t forget the storage plays, which also showed up on the PPI hotlist. The names I mentioned then were Brocade (BRCD), EMC (EMC - Annual Report), Iomega (IOM), Hutchinson (HTCH), Quantum (QTM), SanDisk (SNDK - Annual Report), Seagate (STX - Annual Report) and Western Digital (WDC).

Communications equipment is also showing some signs of strength. Though the latest month was down, the trend seems to be up.

I have actually analyzed Motorola (MOT - Annual Report), so that would be a play to include here. Cisco (CSCO), Research in Motion (RIMM), 3Com (COMS), Nokia (NOK) and Corning (GLW - Annual Report) also come to mind.

And finally, turning away from technology, I hope you didn’t think the aircraft boom was over. If anything, it looks to be picking up steam.

Ways to play this include Boeing (BA - Annual Report), Embraer (ERJ), General Dynamics (GD - Annual Report), United Industrial (UIC) and Cessna parent Textron (TXT). Parts suppliers include Rockwell Collins (COL), Curtiss Wright (CW - Annual Report), and LMI Aerospace (LMIA).

So there you have it: 28 potential stock ideas from what looked at first glance to be a negative report on durable goods.

Disclosure: Long RIMM put options at time of publication.

Embraer Has Military Transport Aircraft Under Study

Embraer (ERJ) confirmed, at a press conference held today, during the Latin America Aero & Defense (LAAD) conference, in Rio de Janeiro, that it has been studying the possible development of a military transport aircraft. If it is actually launched, the EMBRAER C-390, as it is called, will be the heaviest airplane ever produced by the Company and will be able to transport up to 19 tons (41,888 pounds) of cargo. The new project will incorporate a number of technological solutions developed for the successful EMBRAER 190 commercial jet.As a medium-sized military transport jet, the EMBRAER C-390 will have an ample cabin, equipped with a rear ramp for transporting a wide range of types of cargo, including wheeled armored vehicles, and will have the most modern loading and unloading systems.

The military market is quite different from commercial aircraft, and Boeing (BA - Annual Report) and Airbus (EADSF.PK) are already fighting bitterly over the larger jet orders in both military and commercial segments. However, as Toyota and Daimler demonstrated, it is often easier to come in at the low end and move up than to move down from high end products into more economical lines.

We also suspect there are a large number of smaller governments who would like to place their military orders with an underdog rather than an American or European firm that might leave them with a bad taste of imperialism.

Last year we wrote an article called Regional Jet Orders Likely to Continue, in which we applauded Embraer’s (ERJ) receipt of an order for 100 regional jets from China’s Hainan Airlines, and predicted the company would see many more orders ahead (which was true.) Over the weekend, an article ran with a headline suggesting such an order, Hainan Airlines venture to buy 100 Embraer jets | Reuters.com:

Hainan Airlines Co., China’s fourth-largest air carrier, and its parent have set up a regional airline which will buy 100 commercial jets from Brazil’s Embraer by 2012, the Xinhua news agency said on Saturday.

That wasn’t an additional order, it was the same 100 planes that inspired us to write our article. The news is more that the regional carrier is now a legal entity and the orders are thus one step closer to actually being fulfilled. It is also not an insignificant win, with China having launched its own regional jet manufacturer - a fact not lost on the Reuters writer:

Regional aviation, also known as feeder-line services, operates between small cities, with routes typically ranging from 500 to 1,000 km. The services usually use aircraft which seat less than 100 passengers, according to Xinhua.China launched production of a 90-seat passenger jet, known as ARJ21, on Friday, its first home-grown regional jet and a major step toward creating a national champion that it hopes could challenge Boeing (BA - Annual Report) and Airbus (EADSF.PK).

A unit of General Electric (GE - Annual Report) will supply engines for the ARJ21, which will compete with aircraft from Embraer and Canada’s Bombardier.

We still think regional jets have a far more important place in the future of aviation than behemoths like the Airbus A380, particularly in China. Embraer is likely to continue to be a strong competitor there, as it will take some time for China to build the capacity to cover its own demand.

We’ll save our usual “why big jets are unnecessary” comments for those who want to click through to read them. Germany Puts Freight A380 on Ice: Financial News - Yahoo! Finance:

Financially troubled European airplane manufacturer Airbus has stopped work on the freight version of its new A380 superjumbo so it can focus more on the troubled passenger version of the aircraft, a spokesman for its parent company said Thursday.

If that doesn’t say it all, we don’t know what does. The model that doesn’t have significant problems also doesn’t have any customers. Meanwhile, the longer the delays for the passenger version the more likely the plane never gets off the ground.

We have said often that the future of passenger air travel lies in smaller jets flying to smaller cities. The hub and spoke model is outmoded, and large passenger jets are really only well suited for a few major city-pairs. Meanwhile, the freight market that would have helped to defray the costs (because air freight carriers really do need bigger aircraft) seems to remain tightly locked up.

A good example of the direction we see things going is evidenced by JetBlue’s (JBLU) current plans to offer nonstop service from Westchester County, New York.

The flights would begin in March, county officials said. Airport manager Peter Scherer said the airline is considering routines to Orlando, West Palm Beach and Chicago.

We have generally regarded this trend as positive for Brazilian regional jet manufacturer Embraer (ERJ). However, the current valuation may be a bit stretched if insiders are any indication.

Brazil’s Embraer share offering nearly doubles | Reuters.com

Brazilian aircraft maker Embraer said on Tuesday its proposed share offering will be about twice as large as planned because more of its shareholders decided to join the sale.Embraer, the world’s fourth largest commercial aircraft, said in a filing to Brazil’s securities regulator five of its shareholders will offer 72.9 million common shares. In a December filing, the company said two shareholders planned to offer 43.3 million shares.

With major shareholders all seeming to feel like this is a good time to lighten up, investors should probably be wary about buying right now.

First FedEx (FDX) canceled its order for the Airbus (EADS) 380 mondo-cargo plane. Then loyal Airbus customer Lufthansa ordered modified Boeing (BA) 747s for its passenger service.
Report Says UPS May Cancel Airbus Order - Forbes.com

Parcel delivery company UPS, the last remaining customer for the cargo version of Airbus A380, may cancel its order in what would be the latest defection from the long-delayed superjumbo, a French newspaper reported Friday.

UPS has denied canceling the order, and Airbus is simply in the dark. But no matter.

As we said before, the future of passenger air travel lies in smaller jets flying to smaller cities. The hub and spoke model is outmoded, and large passenger jets are really only well suited for a few major city-pairs. Meanwhile, the freight market that would have helped to defray the costs (because air freight carriers really do need bigger aircraft) seems to remain tightly locked up.

And to that point, regional jet maker Embraer (ERJ) remains on a tear.

Embraer Empresa Brasileira de Aeronautica SA, which manufactures commercial jets that seat up 110 passengers, on Tuesday raised its delivery expectations for 2007 to account for five jets that will carry over from last year.

The Brazilian company said it should deliver 165 to 170 jets this year, compared to 130 deliveries in 2006. It delivered 37 jets in the fourth quarter.

Embraer also said its fourth-quarter backlog increased 11.3 percent over the previous quarter and stood at $14.8 billion on Dec. 31.

We think Airbus should get to work on a regional jet program.

A month ago, we said the decision by FedEx (FDX - Annual Report) to cancel its orders for the Airbus A380 jumbo jet meant you could stick a fork in it, it was done. That is not to say that it will never be made, just that it is far less likely to earn its manufacturer a reasonable return on the capital invested.
Now, according to BusinessWeek, that seems even more likely. Boeing Scores a Jumbo Coup:

The Lufthansa board is planning to meet Wednesday and approve the purchase of the 20 Boeing jumbo jets, which are valued at $5 billion at list prices, say people familiar with the negotiations. It would make Lufthansa the launch customer for Boeing’s redesigned and upgraded passenger version of the 747-8, now known as the “Intercontinental.” (see BusinessWeek.com, 11/15/05, “Boeing’s Reborn 747″). Boeing officials declined to comment. Lufthansa officials couldn’t be reached.The sale would be a huge coup for Chicago-based Boeing. It would indicate to airlines that there is a credible competitor to the Airbus A380 super-jumbo, thus diluting the profits Airbus had hoped to make on its big jetliner. Since the launch of the A380, Boeing had offered many passenger variations, but no airlines were willing to buy an aircraft that was first built in 1968. Sales of the 747-400 passenger version had virtually dried up, and industry observers were writing its obituary.

“This is as good as it’s going to get,” says Teal Co. aerospace analyst Richard Aboulafia. “Boeing was able to get a European based, dedicated Airbus customer to be the first to endorse its new 747 passenger version. It’s a blow to the Airbus A380.”

We’ve made no secret of our belief that the future of passenger air travel lies in smaller jets flying to smaller cities. The hub and spoke model is outmoded, and large passenger jets are really only well suited for a few major city-pairs. Meanwhile, the freight market that would have helped to defray the costs (because air freight carriers really do need bigger aircraft) seems to remain tightly locked up:

What’s more, chances look even better for Boeing to dominate—if not monopolize—the air-freight market, since there are questions about whether Airbus will even build its freighter version of the A380. Boeing already controls about 90% of the world’s air-freight capacity. Airbus hoped to change that with its A380 freighter. But the program suffered a near-fatal blow recently when Federal Express canceled its order for 10 A380 freighters. Instead, it bought 15 Boeing 777 freighters. “It was huge for us,” said Jim Edgar, Boeing’s director of cargo marketing. “Federal Express is the largest air-cargo carrier in the world. They’re a trend setter, and everybody watches their decision.”

It is truly amazing how quickly Boeing has been able to regain the luster lost after Airbus appeared to win the jumbo jet battle.

The headline for the durable goods report was not very bright this morning - Durable goods orders slid 8.3 percent in Oct - Yahoo! News

New orders for U.S.-made durable goods tumbled much more than anticipated in October on a big drop in civilian aircraft but were also down unexpectedly when transportation was stripped from the total, a government report suggesting economic weakness showed on Tuesday.
Durables goods — big-ticket items expected to last three years or longer — fell 8.3 percent, the biggest drop since July 2000. The decline was propelled by a 21.7 percent fall in transportation orders, the
Commerce Department said.

But even excluding transportation orders, durables declined 1.7 percent as manufacturing, fabricated metal, and computers and electronics orders all slid.

As is our custom, however, we like to dig a little deeper into the data to determine whether there are any bright spots. Instead, what we saw for the most part was rising inventories and falling orders and shipments. All charts below are based on information provided by the U.S. Census Department and collected by Stock Market Beat.

Although last month we said it looked like it was time to play defense, even that sector is giving back much of its strength.

Also consider computers and related products. Both shipments adn orders are falling through the floor. The potential bullish case is that customers are holding off on equipment upgrades in anticipation of Microsoft (MSFT) Windows Vista. However, given the strong recent performance at Dell and Hewlett Packard (HPQ - Annual Report) this bullish case may be priced in already. That could leave investors holding a heavy bag if the Vista orders don’t come in as expected.

Communications equipment, which had formerly been bucking the trend in technology, has also seen a sharp reduction in order growth.

Semiconductors may be the bright spot, but at this point it seems too early to tell given that the one strong data point is balancing several weak ones. At the least, the strength could support the argument that slowing computer sales and orders are Vista related, and that the semiconductors will be needed to build computers in a few months.

Electrical equipment and appliances also look strong, which is probably due at least in part to strong holiday sales of flat-panel televisions.

There seem to be few places to hide.

We have been saying for months that the Airbus A380 superjumbo jet is just too big:

1. The only most successful US airline, Southwest (LUV) earned its success by offering non-stop flights from smaller airports. Rejional jets could open point-to-point non-stop service to an even larger number of even smaller airports - paving the way for the next Southwest.
2. Smaller jets can be loaded and unloaded quickly, saving precious time for passengers and precious money for the operator - who can keep the jets flying (earning money) rather than sitting on the ground (costing money).
3. Smaller airports allow passengers to pass more quickly through security, further saving time. Plus, greater point-to-point service to more markets means they also save time by not having to connect through hubs.
4. Lacking the dramatic potential of larger jets, regional jets are likely to be avoided by terrorists.

Basically, for most routes passengers won’t want to wait for the other 400 passengers to get on and off before doing so themselves. Smaller jets with direct flights to smaller markets is the way things are going. Up until now, however, air freight has been another story altogether.
News 8 :: KFMB Stations, San Diego, California reports:

FedEx Corp. canceled its order for 10 Airbus A380 jets on Tuesday, the first customer to retract an order for the new jumbo double-decker plane that has been dogged by numerous delays.The world’s largest express transportation company cited Airbus’ production delays and said in a statement that its FedEx Express unit has ordered 15 Boeing Co. 777 freighters with a list price of $3.5 billion and taken options on an additional 15.

FedEx is probably the single most important customer for such a large aircraft. If they are no longer in the market for the A380, you can stick a fork in it. It’s done.