RealMoney Silver - Industrial-Valve Makers May Flow Higher With Prices

Industrial-Valve Makers May Flow Higher With Prices
By Bill Trent
RealMoney.com Contributor
10/18/2007 1:37 PM EDT

Earlier this week, I looked at canners as a possible play on the producer price index (PPI) report prepared monthly by the Bureau of Labor Statistics. I believe that industries that are seeing rising prices may reveal some companies whose revenue will grow or whose margins will improve.

Another industry in which the price increases have been flowing is industrial valves. Although the increases have been flattening somewhat, the 8.3% year-over-year gain in September is still pretty sweet.

As I mentioned last month, some of the industrial-valve makers include Flowserve (FLS) , Crane (CR) and Curtiss Wright (CW) . Let's see how they are doing.

Year/Year Price Increases for Industrial Valves Industry

According to Flowserve, the PPI indicator is right on the money. Flowserve noted in its latest earnings report that its Flow Control Division's "gross margin of 35.6% for the second quarter of 2007 was substantially higher than the second quarter of 2006, up 140 basis points. This increase was principally due to improved absorption on higher sales, the implementation of various Continuous Improvement Programs and cost reduction initiatives and improved pricing."

With sales up 13%, bookings up 15% and pricing remaining strong it looks like the trends could continue for some time.

Crane is also doing well. Crane's Fluid Handling segment saw a 13% gain in sales and a 30% increase in backlog in the latest quarter. However, "margins remained at 12%, reflecting more price competitive project work and investments in new products and systems to support future growth."

That "price competition" isn't doing any damage yet, but it could. It may be especially important to watch the PPI reports going forward to find the right time to get out of a position before the eventual loss of pricing power is picked up in an earnings report three months later.

For Curtiss Wright's Flow Control division, "sales for the second quarter of 2007 were $163.2 million, up 26% over the comparable period last year due to solid organic growth and the contribution from the 2006 and 2007 acquisitions. Sales from the base businesses increased 14% in the second quarter of 2007 as compared to the prior-year period."

Profitability declined, primarily due to cost overruns on a Navy project, but the company noted that margins were also hit by "labor inefficiencies, business consolidation costs, and higher material costs experienced within [its] oil and gas market." The stock has rallied on strong results and increased guidance from its other divisions, however.

After taking a closer look at the three valve makers, I believe Flowserve may be the best way to play the PPI report. For one thing, valves and related products make up a larger part of its revenue. As a purer play, the pricing information conveyed from valve PPI is more relevant.

The better performance has not gone unnoticed by the stock market, which has boosted Flowserve shares more than those of Crane or Curtiss Wright in the last couple of years. However, based on the continued strong pricing environment, it looks like that strong performance could be sustained.