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.

This article was originally published at RealMoney on September 17, 2007 and was featured in the September 24, 2007 Festival of Stocks.

Few stocks boil the blood of both bull and bear as much as Apple (AAPL), and for good reason. The company, richly valued though it is, has come out with more cool products than the rest of the tech industry combined. That helps excite the bulls, and as for the bears, there’s a good chance many of them are jealous for having missed out on the stock’s run. They have sour grapes they hope will someday be pressed into wine. And before you fanboys of some other tech stock get all hot and bothered about my disrespect of your favorite company’s innovation record, allow me to summarily dismiss them.

• Research in Motion’s (RIMM) Blackberry? Great mobile enterprise email device. But that’s for work. Ewww!
• VMWare (VMW)? See above. Not to mention it’s hard to show off your virtual server.
• First Solar (FSLR)? Try this for a pickup line: “Hey, want to go back to my place and see how thin my solar film is?” Unh-uh.
• Google (GOOG - Annual Report)? Still great at search. Nice email product. So what? They’ve spent more than a billion and a half on research and development in the last 12 months, and I dare you to tell me where it went.

As you can probably tell, I haven’t gotten nearly enough hate mail recently, and I’m trying to kick things up a notch. So back to the task at hand: Apple. Let’s quickly take a look at what I think are the best arguments on each side.

First up is whether the “halo effect” from the iPod is helping bread and butter Mac sales. Mac units were up 33% year over year, compared with just 12% for PCs overall. Bears counter that most PC makers (with the exception of industry leader Dell (DELL) had unit growth similar to the growth in Macs. But this ignores the very important point that Mac units sell for much more on average than the typical PC - so in terms of revenue share is likely growing much faster. Edge: Bulls.

Next, is the iPhone a phlop? When 270,000 units were sold in the first two days, I said “the 730,000 they are guiding to for the next three months seem conservative laughably low.” It is now looking as though it was only conservative. It is pretty clear the price cut was driven in part by a significant slowdown in sales - to possibly as low as 5,000 units per day by the time of the price cut according to one convincing analysis. But that would still put the iPhone in the same league as Palm, even if not quite matching their original estimate of being in RIMM’s league next year. But don’t forget - they got where they are now being sold by one carrier in the U.S. As they roll out to other carriers on other continents, they could meet their target yet. It’s not living up to the hype, but it is still a success. Edge: Even.

Finally, the iPod - a product that nobody seems to care about anymore, yet which sold 10 million units last quarter when it hadn’t had a product refresh in ages.

From an accounting standpoint, things are going so well that they are now deferring revenue from their new products rather than booking it up front. This practice will help bake some growth into the cake. True, the company’s earnings were boosted by a penny due to a lower bad debt reserve, but when you are beating quarterly estimates by a quarter that is just chicken feed.

While the stock has nearly doubled over the last year, its free cash flow has more than tripled. As a result, a company that is growing at more than 20% per year on the top line is yielding 3.9% on a free cash flow to enterprise value basis.

About the most significant risk, in my mind, is the possibility of a consumer slowdown combined with increasingly high expectations. Apple is far more consumer-driven than other tech stocks, and a 40x P/E multiple might not hold up if they only beat by a nickel instead of the quarter investors have come to expect. That’s why I think the free cash flow is so important in this case - it provides a solid backstop, and would help justify being patient through a slowdown should it come. If the company can grow at even half the current rate over the next five years, investors are likely to be well compensated for the added risk.

Positions: Short Research in Motion (RIMM)

I took a look through recent conference calls to get a feel for conditions in the smartphone segment.

First, we are pleased to report smartphone sell-through grew 34% to 2.7 million units for the year and now represents 80% of our total revenue, up from 69% last year. In the fourth quarter, our smartphones sell-through reached a record high, 750,000 units, up 43% year-over-year….
Smartphone revenue grew 15% to $1.25 billion on unit shipments of 2.7 million. Unit sell-through for smartphones grew 34% year-over-year to 2.7 million units, while overall channel inventories remained flat….

(Excerpt from full PALM conference call transcript)

Revenue for the first quarter ended June 2, was $1.08 billion, up 16% from $930 million in the previous quarter. Handheld devices represented $824 million, or 76% of RIM’s revenue during the quarter, up from the 73% of total revenue in the previous quarter. Total devices shipped in the quarter were approximately 2.4 million, and were up from 2 million in the prior quarter. Approximately 2.2 million new devices were activated in the Q1, either for new customers or for replacements and upgrades.

(Excerpt from full Research in Motion (RIMM) conference call transcript)

Given that Palm and RIMM have the most exposure to smartphones, the two provide an interesting contrast. RIMM is selling nearly as many in a quarter as Palm did for the year. Both Palm’s Treo and RIMM’s Blackberry are sold worldwide on many carrier networks and in several varieties. Yet a certain upstart selling one model on one carrier network thinks it can catch up with RIMM.

Finally, we reiterate our goal of selling 10 million iPhones in calendar 2008.

(Excerpt from full Apple (AAPL) conference call transcript)

Expressed as 1% of handset units that doesn’t sound like much. Yet when compared to the success built up over many years by a company considered very successful it appears audacious.

Cellular News put out a story called Top 10 Handsets Sales Statistics for July:

The Swedish manufacturer of carrying cases for portable electronics, Krusell, has released their “Top 10″-list for July 2007. The list is based upon the number of pieces of model specific mobile and smart phone cases that have been ordered from Krusell during July 2007. Krusell’s list is unique due to the fact that it reflects the sales of phones on six continents and in more than 50 countries around the globe. 1. (2) Nokia 6300
2. (1) Sony Ericsson K790i/K800i/K810i
3. (3) Nokia N95
4. (4) Nokia N73
5. (9) Sony Ericsson W880i
6. (-) Blackberry RIM 8300 Curve
7. (5) Blackberry Pearl 8100C/G/V
8. (9) Nokia 6233/6234
9. (6) Sony Ericsson K750i/W700i/W800i
10. (-) Nokia 5500 Sport

Notably missing from the list is the iPhone, but then again Krusell isn’t making a case for it yet. Just one of the many potential flaws in this type of market share analysis.

More interesting is the presence of two Blackberry models and nothing from Motorola, given how many observers have fretted over the fact that Research in Motion (RIMM) is carrying a higher market valuation than Motorola (MOT - Annual Report). Perhaps the higher value is deserved.

Or perhaps people just like to wrap Blackberries in leather.

When Motorola, Inc. (MOT - Annual Report) said last week that they would be taking a charge, I said:

When I do the math for taxes and share counts, it looks like the charge will amount to $0.03 per share. Which doesn’t sound like much until you check the earnings estimates, and find that $0.03 was all the company was expected to earn in the quarter. Easy come, easy go.

Turns out I was being too generous. Yesterday the company announced preliminary estimates of second quarter 2007 financial results:

Although the company has not finalized its financial results for the quarter, the company expects second quarter sales to be in the range of $8.6 billion to $8.7 billion. The company previously estimated that second quarter sales would be essentially flat with first quarter 2007 sales of $9.4 billion. The company expects a second quarter GAAP loss per share from continuing operations in the range of $(0.02) to $(0.04), including estimated net charges of approximately $0.03 - $0.04 per share related to previously announced workforce reductions and other highlighted items.

The company’s shortfall in sales and earnings for the second quarter is primarily attributable to lower overall unit volumes in the Mobile Devices business in Asia and Europe.

The previous expectations were already factoring in Motorola’s fall from RAZR-driven grace. So now the question becomes whether the additional weakness is more company-specific problems or whether the entire industry is running into trouble. Samsung’s numbers today should provide a clue.

Update: Sony Ericsson is taking share: Sales in the quarter were boosted by a 59 percent rise in handset shipments to 24.9 million from 15.7 million the previous year.

Research In Motion (RIMM) Reported First Quarter Results. Revenue for the first quarter of fiscal 2008 was $1.082 billion, while GAAP net income for the quarter was $223.2 million, or $1.17 per share diluted. Both numbers were well outside the high end of the guidance range the company provided last quarter, and I feel like a chump for hanging onto my puts.

Given that the deals still abound, the iPhone debuts today and the puts are nearly worthless anyway I will continue to hold onto them, though without much hope of them expiring in the money.

Motorola preannounced but still disappointed, Research in Motion (RIMM) and Palm (PALM) dueled sob stories about smartphone prices, and altogether cellphone makers have been working to prove us right.

As I said a few weeks ago, the performance in our Mobile Devices business in the first quarter was unacceptable, and we are committed to restoring it to profitability and positive cash flow.

(Excerpt from full MOT conference call transcript)

By contrast, Nokia said:

Olli-Pekka Kallasvuo

Thanks, Bill. Good morning and good afternoon, ladies and gentlemen. Nokia had a solid first quarter.

(Excerpt from full NOK conference call transcript)

If there is any indication that the handset market is slowing down, it is Nokia calling 4% year/year growth “solid.” What they mean is, “at least we aren’t in the gutter like some others we know.” Still, a caller pointed out Nokia’s weakness in the U.S. market:

Richard Kramer - Arete

You really didn’t address fully the question previously on the U.S. market. I think a year or so ago when you came on as CEO, you mentioned you were going to spend a week or so out of every month in the U.S. We continued to see units decline year on year. Can you give us some sort of prognosis, when and if the U.S. might turn around for Nokia, and what might spark that happening?….

Olli-Pekka Kallasvuo

I will start with the second question and then I will move on to this turning up the heat matter. If you look at the U.S. market and I simplify a bit, if you allow that, in order to make the point. So in China, we do have about 1.3 billion customers — or potential customers — meaning the consumers in that market. In the U.S., we have four — and I’m not talking about billions here. Four customers. In that way, at the moment because of the operator dominance in the channel, you need to look at each of these customers separately. You have, in this way, one dimension only looking at this situation. So there we have to look at obviously, Verizon Wireless, Sprint Nextel, AT&T, and T-Mobile, the four customers that really are very, very important in the totality.

(Excerpt from full NOK conference call transcript)

That certainly cleared things up. For all the tea there may be in China, the handset customers tend to be buyers of low-end models. One of the big problems for handset makers is the shift to the low end, and the impact that has on margins. And all of the device makers are going to need a better answer for it.

Our first reaction to the Research in Motion (RIMM) earnings was release was that, in line with our forecast, “companies trading at a trailing P/E multiple of 60, as Research in Motion was, are generally held to higher expectations. ” Not wanting to get too cocky, however, we decided to give the transcript a thorough reading to see how management’s comments fit in with our outlook for wireless. For example, the company says:

Pearl continues to do exceptionally well and is available through over 90 carriers around the world, and the 8703 for CDMA continues to show strong adoption and the response to the recent launch of the BlackBerry 8800 has exceeded our expectations.

(Excerpt from the full RIMM conference call transcript)

This appears to contradict our overall bearishness toward the handset market, and particularly the notion that consumer sales may be frozen by the pending Apple (AAPL) iPhone launch. However, anything sold for negative $75 ought to “do exceptionally well,” and management admits as much shortly afterward:

Carrier programs such as mail-in rebates and the launch of the White Pearl with T-Mobile and the launch of the 8800 at AT&T all served to stimulate demand in January and February.

(Excerpt from the full RIMM conference call transcript)

It also jibes with comments from Palm after their recent quarter:

We saw an increase contribution from lower priced smartphones as we introduced the Treo 680 to the market at a lower price point and a sleeker form factor to attract a new customer demographic. As expected, smartphone ASPs declined in the third quarter.

(Excerpt from the full PALM conference call transcript)

Motorola’s comment in the press release preannouncing their disastrous quarter also fits in: “The company expects the Mobile Devices business to incur an operating loss in the first quarter, and to experience a gradual recovery in the second half and be profitable for the full year.” It all adds up to the same message: there are too many handsets available for sale. And, as usually happens when there is too much of something, prices are getting cut so deep that the sellers can’t make any money. They are all acting like the restauranteur who prices the menu to lose money but plans to make it up in volume. Research in Motion even helps us quantify it:

Total devices shipped in the quarter of approximately 2 million were up from 1.8 million in the prior quarter. Sell-through in the quarter was strong with approximately 1.75 million devices being activated, which means we are selling almost two devices for each new subscriber account added.

(Excerpt from the full RIMM conference call transcript)

It also means that they sold 250,000 more to carriers and retailers than the carriers and retailers sold to their customers. That wouldn’t be so bad if the company weren’t piling up its own stash.

Inventory on hand increased by approximately $40 million as we continue to purchase additional raw materials and build semi-finished goods to support demand for current and upcoming product launches.

(Excerpt from the full RIMM conference call transcript)

Of course, that $40 million was just the sequential increase. On a year/year basis inventories are up 90% to $255 million, which is twice the growth rate of sales. The sequential inventory growth of 15.7% is also faster than even the high end of the range for sequential sales growth guidance (10.2% - 15.6%). Again, too many phones.

The thorough reading did little to change our outlook toward wireless or expectations for RIMM stock.

With apologies to Charles Dickens, there are expectations and then there are expectations. Today’s earnings release from Research in Motion (RIMM) met the former but not the latter.

Revenue for the fourth quarter of fiscal 2007 was $930.4 million, up 66% from $561.2 million in the same quarter of last year. The revenue breakdown for the quarter was approximately 73% for handhelds, 19% for service, 5% for software and 3% for other revenue. Revenue for the fiscal year ended March 3, 2007 was $3.0 billion, up 47% from $2.1 billion last year. RIM shipped approximately 6.4 million devices during fiscal 2007.Approximately 1.02 million BlackBerry subscriber accounts were added in the quarter. At the end of the quarter, the total BlackBerry subscriber account base was approximately 8 million. Revenue and subscriber account additions will not be impacted by the restatement referenced above.

Preliminary GAAP net income for the quarter was $187.9 million, or $0.99 per share diluted.

Ignoring the fact that the SEC investigation may require the company to adjust the numbers down again, all of those metrics were more or less in line with the published expectations of Wall Street’s finest. However, companies trading at a trailing P/E multiple of 60, as Research in Motion is was, are generally held to higher expectations. Meeting the published estimates is not enough - they have to be beaten, and preferably by a wide margin. As we noted on Saturday with our earnings preview, “Research in Motion (RIMM) reports on [Wednesday]. Consensus is calling for $0.99 EPS on $933 million in sales, and guidance of $1.04 on $994 million for next quarter. We’re taking the under.” As to that guidance:

Revenue for the first quarter of fiscal 2008 ending June 2, 2007 is expected to be in the range of $1.025 billion-$1.075 billion. Subscriber account additions in the first quarter are expected to be approximately in the range of 1.125-1.15 million. GAAP earnings per share for the first quarter are expected to be in the range of $0.99-$1.07 per share diluted.

The company is forecasting higher than expected revenue but lower than expected profits, which they blame partly on the administrative costs associated with the options investigation. However, gross margins were down 150 basis points year/year and looking at the deals available on Amazon.com (including some that you have to click to a separate page to find out they’ll give you money to take one) we suspect it has more to do with very aggressive pricing in a desperate attempt to get units out the door. If they can only “meet” estimates when giving away the phone (and then some) what can we really expect for sales and profitability with both consumer and enterprise spending slowing and the Apple (AAPL) iPhone launch on the horizon?

Hint: Look at what is happening in the after hours trading for your clue.

The Economic Calendar looks pretty dull next week, with only Friday’s PPI report likely to get us excited. Look for our usual industry pricing power report.

Looking less dull is the earnings calendar, as earnings season officially begins.

• Research in Motion (RIMM) reports on Tuesday. Consensus is calling for $0.99 EPS on $933 million in sales, and guidance of $1.04 on $994 million for next quarter. We’re taking the under.
• Genentech (DNA - Annual Report also reports on Tuesday. Consensus wants $0.67 EPS on $2.75 billion in sales and guidance of $0.71 on $2.9 billion for next quarter.
• Lam Research (LRCX) reports on Thursday. Consensus expects this quarter and next to bring in about $1.06 on $645 million in sales. We are expecting order flow to disappoint.
• Infosys (INFY) reports on Friday.  Consensus wants $0.40 on $865 million in revenues, and guidance for $0.40 on $920 million. They will make the numbers, but investors will listen closely to the update on visas and employee retention.

William Trent currently owns put options against the shares of Lam Research (LRCX).