“Rail moves everything,” said Neuberger Berman’s Gary Kaminsky. Which railroad stock moves him?

Kaminsky likes Kansas City Southern (KSU): “We’ve been the largest holder for some time.

I noted yesterday that railroads were one of the sectors I highlighted recently based on strong pricing evidenced by the PPI report.  However, Kansas City Southern does not fare particularly well in the models I use:

• Earnings momentum – neutral
• Earnings quality – neutral
• Price momentum – positive
• Free cash flow – negative
• Return potential – negative

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

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.

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).

Railroad Execs Say Pricing Power Holds: Financial News – Yahoo! Finance

he financial chiefs of three major U.S. railroads said Thursday they expect their ability to set prices to hold this year and next even though volume has been soft so far this year….Omaha, Neb.-based Union Pacific Corp., for example, said second-quarter volume is down about 4 percent so far, due to weakness in some markets and bad weather that affected shipping.

But the volume woes aren’t expected to affect pricing, said the financial chiefs of Jacksonville, Fla.-based CSX Corp. (CSX), Norfolk, Va.-based Norfolk Southern (NSC) and Union Pacific (UNP).

I found the comment interesting, since I noted way back in December that the huge surge in pricing power the railroads enjoyed in 2005 and 2006 was beginning to peter out. Consider the latest graph, based on yesterday’s PPI release from the Bureau of Labor Statistics:

Granted, the current price increases are still among the best of the last 20 years. So perhaps the managers are taking a longer-term perspective. At any rate I gave up on the trade when I found out Warren Buffett was on the other side of it. Still, that chart doesn’t look to me like pricing power has not been affected.

Gannon On Investing writes:

Warren Buffett’s Berkshire Hathaway (BRK.B) has disclosed a greater than 10% stake in Burlington Northern Santa Fe (BNI). Through three insurance subsidiaries (Columbia, National Indemnity, and National Fire & Marine) Berkshire beneficially owns 39,027,430 shares of Burlington Northern common stock according to an SEC filing made on Friday, April 6, 2007….

This is the biggest single common stock investment made by Berkshire in a long time.It’s big news – and it seems to have caught most Buffett watchers off guard.

The news sent shares of all the railroads higher, and made our put options on Union Pacific – with a $90 strike price – look a bit foolish. So we sold them. You may recall that the original position was taken because we felt that the railroads were losing some of the strong pricing power they have enjoyed recently.

You win some, you lose some. And we lost that one.

The stock market is purportedly worried by today’s higher than expected producer price inflation headline number, as investors become concerned that Goldilox will burn her lips on some hot porridge. We, on the other hand, take our usual look behind the headline numbers to see which industries are potential winners and losers in the current inflation environment.

Does rising inflation for fruit and vegetable canning suggest it is finally time to buy Del Monte (DLM - Annual Report)?

Price increases in corregated boxes had previously been at odds with bad news from trucking companies. Now it looks like box prices may be rolling over.

Industrial gas prices continue to plummet. Are Air Products (APD) and Praxair (PX) defying gravity?

With aluminum prices rising, will Alcoa (AA) shares follow?

The way industrial valve prices are rising, it is no surprise Curtiss Wright (CW - Annual Report) stock is as well.

Railroads may be running out of steam.

Last but not least, telecom pricing is going through the roof.

Which leads us to ask: why, again, is Verizon getting rid of its lines?

Several times we have commented on the transportation names, both for their own investment merits and as an indicator of overall economic activity. Since anything sold from any store is transported there by truck, a slowdown in trucking means stores are seeing no need to stock up. Barry Ritholtz makes that point when discussing the latest American Trucking Association tonnage data at The Big Picture | Truck Tonnage Plummets:

November 2006 marked the single worst month for for-hire truck tonnage since the last recession,” said ATA Chief Economist Bob Costello. “Both the month-to-month and year-over-year decreases indicate that the economic slowdown is in full gear. The most troubling number is the 8.8 percent contraction from November 2005, despite the fact that year-over-year comparisons are difficult due to the very robust volumes during the same month last year. One month certainly doesn’t make a trend, but if we continue to see year-over-year reductions of similar magnitudes in the next couple of months, it could indicate a greater economic slowdown than economists are projecting at this point.”

Naturally, a tonnage slowdown is bad news for truckers. Investors who are into the relative game, can play the non-asset based names like Landstar (LSTR - Annual Report) and CH Robinson (CHRW - Annual Report). Those who simply prefer positive absolute returns may want to steer clear of the whole group.

Disclosure: Author holds put options on FedEx (FDX - Annual Report) and Union Pacific (UNP) and is short put options on Landstar (LSTR - Annual Report).

After years in the doldrums, rail carriers have had a strong couple of years. Union Pacific (UNP), for example, is up about 20% so far in 2006.  A big reason for the gains has been a strong pricing environment as tight truck capacity and higher fuel prices led to a shift toward greater use of rail transport.
According to BusinessWeek, Railroads ride pricing power into 2007:

The nation’s six largest railroads enjoyed arguably the greatest pricing power in their history this year and analysts expect it will continue in 2007, despite forecasts for a further slowdown in the economy.”Pricing will continue to be the story next year,” said Peter Smith, a transportation equities analyst at Morningstar.

In fact, analysts are so bullish on industry pricing that they’re willing to look beyond recent softness in freight volumes. While total volumes so far this year are up 2.5 percent compared to 2005, according to the Association of American Railroads, the week ended Dec. 9 provided railroads with their first weekly volume increase after a string of double-digit declines.

However, the PPI report released yesterday shows that pricing power, too, has all but vanished.  In fact, after surging into the double digits year/year, the one-year change in rail pricing for November was just 3.2%. And falling.

Not the kind of track we like to be on.

Disclosure: At the time of publication, the author holds put options on Union Pacific.

As is our custom, we’ll leave the bickering over the headline PPI numbers and their meaning to others. Instead, we present some of the industries that may be seeing better or worse than normal pricing power. (All grey charts courtesy of the Bureau of Labor Statistics.)
First up is corrugated boxes, which are getting more expensive. This is somewhat confusing, as there doesn’t appear to be much demand for them.

The pricing for industrial gases is getting worse (in sharp contrast to the price charts for Air Products (APD) and Praxair (PX).)

Aluminum is getting more expensive.

Prices for industrial valves are rising at the fastest pace ever, which is probably not priced in at Curtiss-Wright (CW - Annual Report).

Computer prices are declining at a slower pace than normal. On the other hand, how much farther can they decline?

Pricing power for the rails is softening – are the stocks next?

Telephone calls are getting more expensive for the first time since the 1996 Telecom Act.

So those were the ones that jumped out at us this month.