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.

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.

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).

 This morning’s PPI report showd that the frantic price increases for industrial valves have cooled a bit. Still, price gains are well above the long-term average and the general trend still seems to be rising.

According to Alexander’s Gas & Oil Connections:

The market leader positions in the industry changed considerably with the acquisition of Invensys Flow Control by Flowserve (FLS). The combination is now the second largest supplier with a 4 % market share. This compares to a 6 % share for the leader Tyco (TYC). Emerson (EMR) with 3 % is in the third position.The industry is very splintered with more than 1,000 companies carving out niches.

Moog (MOG.A) and Curtiss Wright are others that come to mind as possible beneficiaries.

Producer prices rose 0.7 percent in April – Yahoo! News

Elevated energy costs pushed producer prices up a slightly more-than-expected 0.7 percent in April, but excluding volatile food and energy costs, prices paid at the factory gate were unchanged, a Labor Department report released on Friday showed.

As the headline (and core) numbers get widely reported, I like to dig a little deeper into the PPI report to find industries that appear to have more (or less) pricing power than normal. If the pricing power has not yet been recognized widely it can occasionally lead to some good stock picks. (All pricing power charts are from the Bureau of Labor Statistics.)
The pricing power in fruit and vegetable canning appears to be helping Del Monte gain some momentum.

Refinery margins hurt Large Cap Watch List (Track at Marketocracy) member Frontier’s (FTO) earnings. Is a turnaround in sight?

One place the pricing power theory definitely didn’t work is in industrial gas. The stocks never weakened, and now pricing power seems to be making a comeback.

Consolidation and pricing power? What’s not to like about Mid Cap Watch List (Track at Marketocracy) and Large Cap Watch List (Track at Marketocracy) member Steel Dynamics’ (STLD - Annual Report) prospects?

Pricing power for industrial valves helped me call the recent earnings pop for Curtiss Wright (CW - Annual Report).

Would you looky what’s happening to semiconductor pricing? Who would have expected that?

Well, that seems like enough for now. Back again next month.

Disclosure: William Trent has a long position in SMH.

When we previewed the earnings for Curtiss Wright (CW - Annual Report), we said “PPI data suggests they should beat big, but it suggested the same last quarter.” Well, better late than never.
Curtiss-Wright Reports First Quarter 2007 Financial Results; Increases Guidance: Financial News – Yahoo! Finance

Curtiss-Wright Corporation (NYSE: CW – News) today reports financial results for the quarter ended March 31, 2007. The highlights are as follows:* Net sales for the first quarter of 2007 increased 18% to $332.6 million from $282.6 million in the first quarter of 2006.

* Operating income in the first quarter of 2007 increased 43% to $35.1 million from $24.6 million in the first quarter of 2006.

* Net earnings for the first quarter of 2007 increased 59% to $19.5 million, or $0.44 per diluted share, from $12.3 million, or $0.28 per diluted share, in the first quarter of 2006.

Analysts were expecting the company to earn $0.35 per share on $307 million in sales.  For the year, they are expecting $2.10 on $1.39 billion in sales.

[CEO Martin] Benante concluded, “As we begin the year 2007, we are confident in our ability to generate long-term shareholder value by continuing to grow our sales and earnings. Much of our revenues are dependant upon customer delivery schedules which result in variability from quarter to quarter. However, our operational efficiencies were better than expected in the first quarter and, as a result, we are increasing our full year 2007 guidance to revenues in the range of $1.385 billion and $1.41 billion; operating income in the range of $168 million and $175 million; and fully diluted earnings per share in the range of $2.05 and $2.15. The revised 2007 guidance does not include any potential impact resulting from the recently announced selection of the AP- 1000 design to be used in power plants by China.”

We’re not sure if the analyst expectations include any contribution from the design win. And regardless of any quarterly volatility, one would like to see guidance for the year well ahead of the street when the first quarter EPS has beaten by a dime. But we think the company may be playing its cards close to its vest, and that another solid quarter in Q2 could lead to an even bigger increase to guidance.

The Economic Calendar is relatively light this week. Potential market movers include:

• Wednesday’s Durable Goods report (consensus 2.2%)
• Friday’s advance report on Q1 GDP (consensus 1.8%)

Earnings are another story. We are in the peak part of earnings season this week. A few of the stocks we follow:

Monday

• Altera (ALTR) – valuation is rich but looks set up to beat on earnings.
• Texas Instruments (TXN - Annual Report) – March and June quarters have both had significant downward revisions. Will day of reckoning be forestalled?

Tuesday

• AU Optronics (AUO) – Forecasting losses, but panel business may have bottomed out.
• CDW Corporation (CDWC) – 14.6% sales growth doable given Berbee acquisition.
• CH Robinson (CHRW - Annual Report) – Could beat.
• CSG Systems (CSGS) – earnings should be a piece of cake. If private equity buyers don’t take them out they’ll do it themselves the slow way.
• Lexmark (LXK) – Estimates are doable but we’re always waiting for this company to trip up.
• ST Microelectronics (STM) – Doing the right thing. Hopefully will pay off.
• AT&T (T - Annual Report) – Estimates and stock both keep rising.

Wednesday

• Apple (AAPL) – Hunch: company will blow away earnings, issue horrible guidance and blame it on iPhone build.
• Arkansas Best (ABFS) – We’re staying away from truckers who own trucks.
• Corning (GLW - Annual Report) – current quarter ok, guidance at risk.
• LSI Logic (LSI) – May blame their poor guidance on Agere.
• Maxim (MXIM) – Company is out of gas but focus will be on whether they might sell out.
• Qualcomm (QCOM) – Nokia Nokia Blah Blah Nokia ad nauseam (excerpt from pending conference call transcript)
• Silicon Laboratories SLAB – Sold wireless just when biggest customer began to recover. What other surprises may be in store?
• UPS (UPS) – They shouldn’t have trouble beating the estimates (but that doesn’t mean they won’t).
• Xilinx (XLNX) – Altera with more risk to the earnings target.

Thursday

• Curtiss Wright (CW - Annual Report) – PPI data suggests they should beat big, but it suggested the same last quarter.
• KLA Tencor (KLAC) – Another place we’d rather not be right now.
• Microsoft (MSFT - Annual Report) – Vista is still not living up to expectations.
• MEMC Electronics (WFR) – Earnings surprises have been getting bigger each quarter. Now that we’ve put a semiconductor name on our Large Cap Watch List (Track at Marketocracy) it will probably stop just to spite us.
• YRC Worldwide (YRCW) – See Arkansas Best.
• Sandisk (SNDK - Annual Report) – Will take more than one quarter to clear the channel inventory.

Friday

• Dassault Systemes (DASTY) – We like Ansys (ANSS) better but don’t see why this name wouldn’t beat.
• Ceradyne (CRDN)  – Earnings could be anywhere and don’t really matter.

Enjoy!

Disclosure: William Trent has a long position in SMH.

Producer prices up 1 percent in March – Yahoo! News

Overall producer prices rose 3.2 percent from March a year ago, the biggest climb since a 3.8 percent 12 month gain to August 2006.However, core producer prices rose 1.7 percent from the same period 12 months ago, down from a 1.8 percent year-over-year rise in February.

That’s all well and good, but also well reported. However, we like to dig a little deeper and see which industries are benefitting from pricing power, as it could help us identify interesting stock ideas. The PPI charts are from the Bureau of Labor Statistics and presented as the year/year percentage change in price.

Highlight: Anyone know a good pure play in the turbine business?

Fruit and vegetable canners have pricing power:

And it still isn’t showing up in Del Monte’s (DLM - Annual Report) stock price:

Corrugated box prices are getting weaker:

Which may be a signal that demand for them – say, from FedEx (FDX - Annual Report) – is weak:

Given what’s happening to chemical pricing:

We think Dow (DOW) should be more receptive to buyout talks.

All the buyers for industrial valves:

Should be good for Curtiss Wright (CW - Annual Report).

Scarily for DELL (DELL) and Hewlett Packard (HPQ - Annual Report), computer pricing may only get worse.

Finally, semiconductor prices have taken a turn for the worse.

That should be enough to chew on over the weekend.

Disclosure: William Trent has a long position in SMH.

Investors didn’t like the PPI headline this morning, as inflation can be bad for the stock market. However, inflation can be good for companies that have the pricing power, so we try to look through the industry breakdown in PPI for clues as to who those companies may be.

For example, fruit and vegetable canning continues to exhibit strong pricing power:

Yet the market downturn has led Del Monte to give back most of its recent gains.

Meanwhile, corrugated box pricing has rolled over.

When combined with a slowdown at the consumer level, we think this could be bad news for the transportation companies that will have fewer boxes to move around.

Just when we were ready to give up the ghost, the weaker industrial gas prices appears to have broken through to Air Products:

Industrial valve prices are telling us to be patient with Curtiss Wright:

Finally, we have to point out the semiconductors. A price increase is unheard of in this industry, yet supposedly there was one. This is definitely the first we’ve heard about it, but it is worth pointing out just in case.

It would certainly make the market appear less bullish than we had thought.