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.

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).

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.

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.

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.

Does it work? Well, anecdotes and evidence are two different things – but anecdotally last month’s post got off to a good start. We showed the (then-current) chart on fruit and vegetable canning inflation (the now current is below) and asked if it might signal that it is finally time to buy Del Monte (DLM - Annual Report).

As it turns out, it might have been a good time after all. Here is what happened to Del Monte since:

The pricing power is still creeping up.

We also asked, “With aluminum prices rising, will Alcoa (AA) shares follow?” They did.

The last two months we noted that Air Products (APD) and Praxair (PX) appeared to be defying gravity, as their share prices were rising while their pricing power was falling. The stocks are still high, but pricing power is returning so we’ll scratch that concept for now.

We had found the strength in paint and coating prices mysterious given the slowdown in housing and autos, two big users of paint and coatings. As time passes, the pricing power seems to be evaporating.

With the pricing power in industrial valves, we’re thinking Curtiss Wright’s guidance is too conservative. The shares fell on the news.

And last but not least, things look about as good as they can get for computer makers.