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.

I recently looked at some of the enterprise software calls to get a check on tech spending. Today I take a look at hardware. The big (and most recent) news came from Cisco (CSCO):

Our balanced product momentum across our core technologies and advanced technologies continues to be the best I have seen in a number of quarters….
Let me approach it from a broad perspective. First is what we are seeing is the importance of balance on a global basis. I have been in this business for 30 years — Jim, I think you have been there that long or maybe a hair longer. It’s the strongest global economy I have been a part of.

(Excerpt from full CSCO conference call transcript)

It was funny that nobody challenged him on this, as anyone who has been in the business for long must surely remember Chambers’ comments in 2000. According to a CIO Magazine case study called “What Went Wrong at Cisco:”

Xilinx’s Wall Street warning came two months before Cisco Chief Strategy Officer Mike Volpi told The Wall Street Journal in November, “We haven’t seen any sign of a slowdown.” Volpi told The Journal that Cisco hadn’t changed its internal plans since the beginning of its fiscal year in August. “We have guided [Wall Street] accurately, and we can execute to plan.”
On Dec. 4, CEO Chambers crowed to analysts, “I have never been more optimistic about the future of our industry as a whole or of Cisco.”
Eleven days later, CIO Solvik says, the company saw the problem for the first time.

In case you were wondering, Xilinx (XLNX) lowered its guidance in June, then missed the lower estimate. However, they didn’t pin the blame on Cisco. On their call, they said:

During last quarters’ call, we forecasted that all geographies extension plan would be up sequentially. Japan was down sequentially as planned, but so was Europe, which turned out to be surprise. This quarter our top 10 European accounts, which represent 45% of total European sales were up 16%, but the main remaining channel accounts were down 19%. The weakness was mainly in the distribution channel across a few end markets including industrial, audio and video broadcast and data processing.

(Excerpt from full XLNX conference call transcript)

Turning to some other companies, EMC (EMC - Annual Report) is certainly having no trouble.

Looking quickly at the IT spending outlook for 2007, we see a positive environment in all major geographies and we believe there is opportunity for us to beat our annual financial targets for revenue, earnings per share and cash flow. EMC’s positive results and momentum are obviously only possible because customers are embracing our strategy, our leading products, our services and our solution sets at each of our four businesses — storage, content management and archiving, RSA security and VMware.

(Excerpt from full EMC conference call transcript)

Other tech companies aren’t so lucky. Sun (a href="http://stockmarketbeat.com/blog1/category/tech/sunw/">SUNW - Annual Report) said:

Sun’s total revenues for the fourth quarter of fiscal year 2007 were $3.835 billion, an increase of 0.2% as compared with $3.828 billion in revenue reported for the fourth quarter of fiscal year 2006.

(Excerpt from full SUNW conference call transcript)

The largest technology distributor, Ingram Micro (IM) had a mixed quarter - overall sales were reasonably strong but currency fluctuations played a big role:

On a regional basis, North America sales where $3.3 billion, essentially, flat versus the prior year or 40% of total revenues. As we described at last quarter warranty sales on behalf of our vendors are now recognized as net fees rather than gross revenues in cost of sales as reported in the prior year period. We saw a negative impact on year-over-year sales comparisons of approximately 5%. European sales were $2.78 billion or 34% of total revenues, an increase of 16% versus a year ago. The translation impact of relatively strong European currencies contributed an 8 percentage point positive impact on comparisons to the prior year.

Asia pacific sales were $1.76 billion, an increase of 31% over the prior year and 22% of our total sales. Finally Latin America sales were up 4% versus last year to $344 million representing 4% of our total sales.

(Excerpt from full IM conference call transcript)

Much like the software conference calls, the outlook appears reasonably positive. However, I’m not ready to break out the champagne and say were past the tech spending doldrums. Results are mixed, the financial sector is very important to tech spending, and Cisco’s forecasting track record doesn’t help my confidence level. While I’d love to see tech spending improve, I’ll have to see it to believe it.

Disclosure: Author is long IShares MSCI Japan Index (EWJ) at time of publication.

Mid Cap Watch List (Track at Marketocracy) member Synnex (SNX) reported strong earnings just before it was added to the Watch List. It just filed its 10Q, so I decided to take a quick look. This post was featured at the Festival of Stocks.
Synnex is a Business Process Outsourcing (BPO) company. Other companies hire Synnex to manage business functions such as distribution, assembly and logistics. Nearly all of the company’s sales are to North American customers. Hewlett Packard products account for 28% of the company’s distribution sales.

The first thing I noticed was a large increase in accounts receivable, which rose more than 50% since November compared to a 9% increase in sales and resulted in negative cash flow from operating activities for the first six months of the year. It turns out the company changed the way it accounts for certain receivables:

The Company has established a revolving securitization arrangement (the “U.S. Arrangement”) through a consolidated wholly-owned subsidiary to sell up to $350,000 U.S. trade accounts receivable based upon eligible trade receivables (“U.S. Receivables”). The U.S. Arrangement expires in February 2011. The Company’s effective borrowing cost under the U.S. Arrangement is a blend of the prevailing dealer commercial paper rate and LIBOR plus 0.55% per annum. Prior to amending the U.S. Arrangement in February 2007, the Company recorded the previous U.S. Arrangement as an off-balance sheet transaction because the Company funded its advances by selling undivided ownership interests in the U.S. Receivables. The amended U.S. Arrangement requires the Company to account for this transaction as an on-balance sheet transaction because the Company funds its borrowings by pledging all of its rights, title and interest in and to the U.S. Receivables as security.

Including more of the receivables on the balance sheet will improve comparability in the future, and earnings will be of higher quality. Still, however, the company’s Canadian division can continue to carry as much as $125 million in receivables off balance sheet. The fact that such a large percentage of receivables was carried off-balance sheet in the past should encourage investors to be especially vigilant when it comes to earnings quality issues.

Synnex operates on thin profit margins (net profit margins are less than 1% of sales.) Given the potential for fixed cost leverage, minor increases in revenue could lead to very large earnings gains. However, the leverage also works the other way and the company could quickly experience losses should there be a revenue setback. Revenues are highly dependent on the end-market demand for IT products and services.

During the first six months of the fiscal year Synnex paid total consideration of approximately $115 million to acquire four companies. Despite the fact that this amount represents approximately 18% of the company’s market capitalization, the company claims that “The above acquisitions, individually and in the aggregate, did not meet the conditions of a material business combination and they were not subject to the disclosure requirements of SFAS No. 141, “Business Combinations.” The acquisitions were:

• Link2Support, a technical support and contact center based in the Philippines
• PC Wholesale, an IT distributor focused on refurbished and end-of-life equipment
• China Civilink, a China-based domain registration and web hosting provider
• Redmond Group, a consumer electronics distributor

Synnex also has a complicated relationship with MiTAC International, which owns 46% of the company’s shares. Matthew Miau serves as Chairman for both companies. MiTac is a major supplier to Synnex but supply agreements have been informal and there are no contracts or other assurances the relationship will continue. MiTAC introduced the company to several customers, including Sun Microsystems (a href="http://stockmarketbeat.com/blog1/category/tech/sunw/">SUNW - Annual Report), with whom the company’s account requires a continued relationship with MiTAC.

Due to the thin profit margins and concentrated ownership, Synnex is not the type of name I would hold for a long-term investment. To me, it seems better suited for trading opportunities when demand for IT products and services is growing rapidly.

With indications of a consumer spending slowdown building, hopes for real GDP growing at 2.5% must anticipate a fairly significant contribution from business spending (since the consumer accounts for roughly two thirds of the economy.) However, the latest poll of Chief Information Officers (CIOs) by CIO Magazine does not paint a particularly rosy picture. In fact, the only thread on which the bulls can cling is that CIO sentiment is frequently more of a lagging than a leading indicator of tech spending. As evidence, consider this quote from the poll findings:

In the December Poll, panelists project IT budgets will grow by 5.8% over the next 12 months, down from 6.5% in the September poll. In addition, CIOs report that IT budgets increased by an average of 5.8% over the last 12 months, up from 5.0% last quarter.

Hmm… the estimate for the next twelve months happens to be exactly what happened over the last 12 months? Definitely has the ring of a lagging indicator. But regardless, the results offer something of a glimpse into CIO plans.

Findings from the quarterly CIO Magazine Tech Poll(TM - Annual Report) show IT spending projections decreased in October-December with CIOs predicting IT spending increases of 5.8% over the next 12 months, down from 6.5% in the previous quarter. Poll results also show the majority of CIOs (63.6%) have no plans to invest in Office 2007 or Vista 2007 next year. Key focus categories of growth are Computer Hardware, Storage and Security.

So mixed news for Microsoft (MSFT - Annual Report) and a glimmer of hope for DELL. Since storage and security have recently been key spending areas anyway, it is hard to say whether calling them a focus area means improvement or not. As evidence, consider this quote from the poll findings:

In the December Poll, panelists project IT budgets will grow by 5.8% over the next 12 months, down from 6.5% in the September poll. In addition, CIOs report that IT budgets increased by an average of 5.8% over the last 12 months, up from 5.0% last quarter.

Hmm… the estimate for the next twelve months happens to be exactly what happened over the last 12 months? Definitely has the ring of a lagging indicator.

The CIO Magazine Tech Poll results are used to construct the CIO Magazine Tech Future Growth Index (TFGI), which projects IT activity over the next 12 months1. In December the TFGI is 2.3, down from 2.5 in September.

The problem is, even if considered as a contrary indicator, the stock market hasn’t priced much calamity into tech stocks of late.

William Trent currently has a short position in put options related to Office Depot (ODP).

Oracle (ORCL - Annual Report) CEO Larry Ellison announced the company will offer steeply discounted rates for the follow-on support customers need after installing (for free) the Linux operating system from vendors such as Red Hat (RHAT). Widely perceived as an attack on Red Hat, Yahoo! Finance notes:

The threat triggered a 16 percent decline in Red Hat’s stock price, reflecting investors worries that the pricing war will destroy one of the most successful businesses in the open-source software movement.

“Oracle has outsmarted Red Hat,” said industry analyst Trip Chowdhry of Global Equities Research.

Oracle’s challenge comes just a few months after Red Hat trumped the much larger company by buying open-source software maker JBoss Inc. for $350 million.

Ellison said he is more interested in accelerating the open-source movement than crushing Red Hat.

Because much of Oracle’s propriety software is designed to run on the Linux operating system, Ellison believes the company will make more money if more major corporate customers embrace open-source software.

For Oracle, taking a bite out of Red Hat’s few-hundred-million in annual sales is chicken feed. As CNet reported back in April, Oracle’s vision for the future is to control a complete software stack (complete set of software needed to implement solutions, from operating system to applications):

Oracle CEO Larry Ellison told the Financial Times that he would “like to have a complete stack.” Oracle makes billions of dollars selling databases and business applications. In recent years, the company has bought up many other companies, including rivals like PeopleSoft and Siebel Systems.

“We’re missing an operating system. You could argue that it makes a lot of sense for us to look at distributing and supporting Linux,” Ellison told the newspaper.

The CNet article also includes a table comparing how various software makers “stack” up:

USA Today has a breathless story on US firms cutting R&D and fears that this could make the companies and the country less than competitive. While R&D are usually good uses of money, sometimes they can be taken too far. Look at all of the inventions made at Xerox’s (XRX) Palo Alto Research Center that were not commercialized until outsiders came in for a look-see. Research is no good unless it leads to development and ultimately to sales.

IBM on Wednesday plans to launch a consulting service to help businesses manage R&D efforts. It’s needed because companies increasingly must do more with smaller budgets, IBM executive Melvin Weems says.

Sounds reasonable to us, although we question whether the reduntant R&D savings will offset the consultant overhead, but that is another story. More »