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 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.