Canners Offer a Fresh Trade

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 in which prices are rising may contain companies whose revenue will grow faster or whose margins will improve.

Of course, like any initial screen, the PPI report is only a starting point. 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.

The first industry I mentioned last month was fruit and vegetable canning. Year-over-year price increases for the industry have been well above average, and although they have come down a bit from a peak earlier this year, the upward trend still appears to be in place; inflation ticked up to 5.5% last month from 5.3% in August.

As I noted last month, possible plays on this industry include packaging companies (can makers) such as Ball Corp. (BLL - commentary - Cramer's Take), Crown Holdings (CCK - commentary - Cramer's Take) or Silgan (SLGN - commentary - Cramer's Take). Or you can go to the food processors such as Campbell Soup (CPB - commentary - Cramer's Take), Del Monte (DLM - commentary - Cramer's Take), Hain Celestial (HAIN - commentary - Cramer's Take) or H.J. Heinz (HNZ - commentary - Cramer's Take).

Year-Over-Year Price Increases in the Canning Industry

Source: Bureau of Labor Statistics

Let's start with Ball. When Ball released second-quarter results, it said it would increase capital spending "related in part to 2008 capacity additions for Europe, where we are essentially sold out this year and next." President and CEO R. David Hoover called the first six months of 2007 the best half-year in Ball Corp.'s 127-year history in terms of sales and earnings. The strong first half supports the initial PPI reading, and the continued strength in pricing power suggests more good news to come.

However, Crown Holdings noted in its earnings report that raw materials prices were also rising. Passing through cost increases helps sales growth, but may not benefit profit margins. Crown may be more exposed than others in the industry, suggesting greater caution on the name and an eye on raw material costs if any investments are made.

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At the time of publication, Trent had no positions in the stocks mentioned, although positions may change at any time.

William A. Trent, CFA, is a freelance equity analyst based in the New York metro area. He has been an equity analyst since 1996 and is co-author of Understanding and Evaluating Prospectuses, Offering Documents, and Proxy Statements. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Trent appreciates your feedback; click here to send him an email.