Go With the Flowserve

Late last year, I used the government's PPI data by industry to scout out 26 investment ideas, among which were industrial valve manufacturers Flowserve (FLS - commentary - Cramer's Take), Crane (CR - commentary - Cramer's Take) and Curtiss-Wright (CW - commentary - Cramer's Take). In October, I said Flowserve may be the best way to play the PPI report.

Since that column in October, Flowserve has gained more than 22.5%, while the S&P 500 has lost nearly 12%. Now the question is whether to let this winner ride or to take the money and run. For now, I think the answer is to keep on going with the Flowserve.

For one thing, they call them "industrial" valves for a reason -- there is likely limited exposure to a consumer slowdown. According to the most recent 10K, the company's customer mix by end market is approximately 43% oil and gas, 23% general industrial, 15% chemical, 13% power generation and 6% water treatment. These are industries with long-term planning needs, many of which are finding themselves behind the curve. I don't see them slowing their spending anytime soon.

This is supported by the pricing power the industry continues to enjoy. Although off the 2007 peak in the double digits, the year-over-year change in January was still far above the industry's long-term average and still indicating an overall rising trend.

12-Month Percentage Change in Industrial Valve Manufacturing Prices

Click here for larger image.

Source: Bureau of Labor Statistics

The pricing power is also flowing through to earnings. Flowserve is set to announce earnings on Feb. 27, but they preannounced in a big positive way at the end of January, which explains most of the stock's run. Curtiss Wright shares, meanwhile, gained 7% on Tuesday when its earnings beat estimates by 9 cents a share "led by our Flow Control and Metal Treatment segments, which experienced strong organic growth of 23% and 15%, respectively, over the prior-year periods." Crane also walloped estimates when it reported last month.

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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.