My latest post is up at RealMoney.

In it, I extend yesterday’s observations about the hidden strength in durable goods orders to specific industries that might benefit. Among those industries were primary metals, computers and electronic products, and motor vehicles and parts.

These industries may prove to be a good starting point for further research.

My latest column is up at RealMoney. Here is a summary:

Government economic reports can do more than just indicate the state of the economy. Since many of the reports include industry-level data, digging deeper in the reports can help investors find specific industries to consider more closely. For example, the Bureau of Labor Statistics, which prepares the PPI report, provides detailed information on an industry basis.

Since I wrote about the PPI data in September, the pricing power has shifted to some different industries. Therefore, I thought an update would be in order.

Some of the industries that look interesting are petroleum refineries, industrial gases, computers, computer storage devices, and line-haul railroads.

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

This article was originally published at RealMoney on November 6, 2007.

Parametric Technology (PMTC) develops software used for Product Lifecycle Management (PLM) and Enterprise Content Management (ECM). At a P/E of approximately 15x and a 5.3% free cash flow yield, Parametric appears cheap relative to other technical software developers. However, its earnings quality has historically been low and it faces more severe competition than some of its peers. With earnings quality improving and the valuation favorable, PMTC certainly bears watching. But for now I think Dassault Systemes (DASTY) and Ansys (ANSS) have sufficiently better prospects to justify their higher valuations.

Compared to companies like Ansys, which develops highly technical products and has relatively few competitors, Parametric has significant competition in each of its business segments.

PLM competitors include Dassault Systemes SA, Siemens (SI) subsidiary UGS, Autodesk (ADSK) and Agile Software (AGIL). They also compete with larger enterprise-solution companies such as SAP (SAP - Annual Report) that have entered the PLM market and offer solutions integrated with their other enterprise software applications.

ECM competitors include EMC (EMC - Annual Report) Documentum, IBM’s (IBM - Annual Report) FileNet, OpenText, Adobe (ADBE) Framemaker, and the Microsoft (MSFT - Annual Report) Office suite.

Parametric suffered mightily during the tech downturn, but since 2004 the company has been engineering a turnaround based on improved profitability and a return to growth. Current consensus growth estimates for the next five years are just 7%, or half the rate expected for the industry. The lower growth estimates are part of the reason for the cheaper valuation. However, they also make for a lower bar to clear, and the recent reversals of its deferred tax valuation allowance are a signal that the company is now “more likely than not” to earn sufficient income in future years to utilize tax losses from prior periods.

There are a few other issues that cause me to think Parametric’s low valuation is justified. For example, 58% of revenues are derived in North America, which faces an uncertain near-term economic outlook.

Another issue is earnings quality. Gross margins have been declining due to a higher percentage of revenue being derived from consulting and training rather than license and maintenance revenue. A bad debt charge-off in 2006 and increased customer financing activity are other signals that earnings quality may be low.

To get a feel for overall earnings quality, I calculated the accrual ratio, or the change in net operating assets divided by average net operating assets. This ratio describes the percentage of earnings contributed by discretionary accounting items rather than actual cash flows. An ideal accrual ratio would fluctuate around zero. Parametric’s has been all over the map, though it has been improving for several quarters.

Sources: Zacks Research Wizard, William A. Trent

If Parametric continues to improve its earnings quality, or if it gives back some of the stock gains it enjoyed post-earnings (or preferably both!) it could become an attractive buy candidate.  In the meantime, interested investors may find an option play worthwhile.

The January 17.50 puts were trading recently at $0.50/$0.75. If you could write the option for $0.60 it would offer a 3.1% 2.5-month return on the money at risk, which annualizes to nearly 15%. You’d be forced to pay $17.50 for the shares if they drop between now and then, but the option premium would give you an effective price of just $16.90. At that price, the 6.0% free cash flow yield would probably be enticing enough to justify a buy anyway.

Disclosure: Short naked put options on Ansys (ANSS)

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

This article was originally published at RealMoney on October 17, 2007.

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.

In the technology sector, prices almost never go up. But sometimes they decline at a slower rate than normal, which tends to have the same effect on sales growth and profit margins.

Last month I noted that the year/year price declines for computer storage devices were the lowest they had ever been. Although pricing ticked down in September from that level, it is still one of the strongest readings on record.

Source: Bureau of Labor Statistics

There are 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). It will require a closer look to see which ones seem like the best bets.

Brocade beat earnings estimates last quarter, and although they said the industry remains competitive the competition didn’t seem to be hurting pricing. On their conference call, Brocade noted that “From a pricing perspective, the pricing environment for the past several quarters has been more favorable than historical levels. While we believe ASP declines may eventually return to mid single-digits per quarter, as competitors ramp their new product offerings, our current outlook is for a relatively benign pricing environment in Q4, with ASP declines once again in the low single-digits.”

The competitive environment for storage continues to be mitigated by consolidation. Brocade bought McData, Seagate bought Maxtor and EVault, and Quantum’s purchase of Advanced Digital Information Corp. has since been followed by the Western Digital/Komag merger.

The buzz around EMC has almost entirely been around its holdings of VMWare (VMW), but that is far from all the company has to offer. Compared with the second quarter of 2006, EMC systems revenue increased 18% year-over-year, led by strong revenue growth from the company’s mid-range information storage products. EMC systems revenue represented 43% of total second-quarter revenue. However, on the conference call management said the pricing environment has always been competitive and that they “don’t see any significant sea change here in the pricing environment.”

Iomega saw 46% year/year revenue growth and an increase in gross margins from 16.7% last year to 20.5% this year. That would seem to support the pricing power hypothesis but nobody seemed to notice much. Although the stock rallied ahead of that report it has gone nowhere since.

Hutchinson is one of the disk drive industry’s top suppliers. They actually bucked tech industry norms and raised prices. “Overall average selling price in the fiscal 2007 third quarter was $0.80, compared with $0.79 in the preceding quarter and $0.84 in the fiscal 2006 third quarter. The increase in average selling price compared with the preceding quarter resulted from a higher percentage of newer products in the fiscal 2007 third quarter sales mix. “We expect our average selling price to be flat to slightly up over the next year as our sales mix continues to shift to a higher percentage of newer products,” said [CEO Wayne] Fortun.” How’s that for evidence supporting the PPI report? You wouldn’t guess it from the way the stock has acted over the last year.

Quantum’s GAAP gross margin rate was 31.8 percent, a significant increase over the 27.9 percent rate in the same quarter last year and its best performance in three years. Seagate also beat estimates.

Western Digital raised guidance, and gives credit to improved pricing power. “Western Digital also said its gross margin should hit 17.5%, rebounding from lows in previous quarters and above its prior estimate of 15.5%. The change reflects firmer pricing power after years of price wars with Seagate and Asian rivals like Hitachi.”

The only company that didn’t confirm the PPI result was SanDisk, which operates in a different segment of the storage market. Sandisk’s average price per megabyte sold declined 65% on a year-over-year basis and 26% sequentially.

Other than SanDisk, however, the ideas generated from the PPI report seem very fruitful. Depending on whether you like small caps, large caps, value, momentum or low price strategies there is likely a storage name for you.

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).

The normal trend in technology hardware is for prices to decline. Therefore, “pricing power” can be a relative concept, occurring when prices fall at a slower rate than they normally do. Looking at the recent PPI data, such a situation may apply in the computer storage industry.

Price declines are as low as they have ever been and the rate of decline has been steadily improving since late 2002. Has the trend run its course or will things get better still? For answers I turned to some recent conference calls.

Western Digital (WDC) is indicating that price competition has heated up.

John Coyne

Yeah, I think as an overall statement both in notebook and desktop environments, pricing in the last quarter continued to be competitive. I think as we look forward into the traditional stronger seasonal period in the next couple of quarters, we have already begun to see evidence of our customers understanding that supply is a critical element as well as pricing. And so, I expect that we will see our customers at placing more value on supply and the ability of companies to reinvest in the technologies and the product breadth that will support their future needs.

(Excerpt from full WDC conference call transcript)

Seagate (STX - Annual Report) isn’t looking for the seasonal demand to help much.

Charles Pope

Okay, this is Charles I will answer both of those questions. In the September quarter we have built into the guidance continued aggressive pricing not as aggressive as in the June quarter but still at the low end of range of what is normal and historically in the September quarter we’ve actually seen a dropped below the normal range. We do not assume that it is prudent to anticipate it dropping below the normal range in the environment that we are in, and so that’s the main reason for not seeing any margin expansion even given the seasonal up tick.

(Excerpt from full STX conference call transcript)

EMC says pricing is always competitive.

Joe Tucci

I’ve been in this industry now for seven years and it’s always been aggressive. So I don’t see any significant sea change here in the pricing environment. It’s always been a tough environment, we have to always watch our cost, our supply chain and our margins. And I think if you look at our results, I think we’re doing a fair job on all three and we will continue to do that. But I don’t see any significant huge sea change out there. Is what I call the pricing environment competitive? I sure would. And has it been competitive for a long time? Absolutely.

(Excerpt from full EMC conference call transcript)

Given what the industry representatives are saying, I’m interpreting the fact that price declines being at their best level ever means they are likely to get worse.

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.

Ingram Micro Inc. (NYSE: IM), the world’s largest technology distributor, announced financial results for the second quarter, which ended June 30, 2007. Worldwide sales for the quarter were $8.19 billion, an 11 percent increase from $7.40 billion in the prior-year period and an all-time record for a second quarter. The translation impact of the relatively stronger European currencies had an approximate three percentage-point effect on comparisons to the prior year.

8% growth ex currency is the type of fairly bland result we have been seeing from tech companies for a long time.  I had been turning hopeful as CDW Corp.’s (CDWC) sales growth accelerated, and some of the economic indicators suggested a bottoming out. But EMC’s  (EMC - Annual Report) results and the durable goods report are throwing cold water on the thesis. Ingram didn’t make things worse, but it didn’t make them better either.

EMC (EMC - Annual Report) reported earnings this morning, and their sales of $3.12 billion were higher than consensus of $3.07 billion and earnings per share of $0.16 beat the $0.15 consensus. So why did the guidance for the full year (now half over) fall short of consensus?

Consolidated revenue for 2007 is expected to exceed $12.7 billion.
GAAP diluted earnings per share for 2007 are expected to exceed $0.64.

The consensus estimates were $12.78 billion and $0.68. When I previewed this week’s earnings reports I said EMC provides a decent look at enterprise tech spend. Other reports I have seen indicate that tech spending is improving, not slowing. Is EMC being too conservative, are they losing share, or are the other indicators giving a false reading?