Industrial-Valve Makers May Flow Higher With Prices

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.

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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.