This article is a reprint of my 7 August 2008 RealMoney column.

Crown Holdings CCK - Annual Report) looks to me like the type of boring stock Peter Lynch would love. The company’s primary products include steel and aluminum cans for food, beverage, household and other consumer products and metal caps and closures.

Cans and bottle caps certainly don’t sound particularly glamorous. A glance at the recent producer price index report, however, shows that this industry has been steadily gaining pricing power over the last several years.

Year/Year Change in PPI Index for Fruit and Vegetable Canning Industry

Click here for larger image.

Source: Bureau of Labor Statistics

You may be surprised by how much innovation actually occurs in the business. The company highlights its research and development activities, including the SuperEnd beverage can end, which requires less metal than existing ends without any reduction in strength, and value-added shaped beverage, food and aerosol cans, such as Heineken’s keg can. Innovative products and strong industry pricing showed through when the company reported second-quarter earnings on July 17. Analysts were expecting the company to earn 55 cents per share. The actual earnings came in at 61 cents because of both higher volumes and stronger pricing. A particular strong area was the company’s European operations.

Growth in a Plain Metal Can

Wachovia Capital Markets analyst Ghansham Panjabi said second-quarter results reflect “torrid growth” in Crown’s European beverage can business. I suspect that if you asked 100 investors at random to describe Crown’s business, “torrid” would not be a common response. Of course, that is the point. Everyone knows that Apple (AAPL) , for example, is experiencing torrid growth. And they are paying up for it. With Crown, you find strong momentum while the stock is still flying under the radar of most investors.

The company is expecting more of the same. As recently as April, the company expected segment income of $750 million to $780 million. It now expects $800 million to $820 million for the full year. Analysts raised their earnings per share estimates to $1.68 this year and $1.98 next year, up from the prior levels of $1.61 and 1.93, respectively.

A Further Indicator

Better still, this year’s earnings-per-share growth is hampered by a higher tax rate stemming from the reversal of a deferred tax valuation allowance late last year. Companies must take such an allowance when it is “more likely than not” that future net income will be insufficient to use deferred tax credits before they expire. Reversing such an allowance is a signal that management expects future profits to be better than previously thought. Further, until the tax rate is normalized the underlying earnings growth is understated. On an apples-to-apples tax basis, earnings per share would have grown 36% in the first six months of 2008 — twice the reported growth rate. The company also increased its free cash flow guidance, even after boosting planned capital expenditures. It now expects free cash flow to be in the range of $350 million to $390 million after capital expenditure of $185 million.

At the midpoint of its free cash flow guidance, Crown is yielding 8.3% of its market capitalization — a solid premium over the yield on five-year Treasuries. At 14 times the 2009 consensus estimate (at the very low end of the company’s five-year P/E range), it is hard to argue that investors have priced in significant growth.

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

This article is a reprint of my 5 August 2008 RealMoney column.

With consumers under duress, it is likely wise to avoid consumer-discretionary stocks, especially those in companies that sell goods that cost thousands of dollars. But few fortunes are made by following conventional logic, and often investors must look for unconventional opportunities that may be unfairly priced. I think Polaris Industries (PII) may be one such opportunity.

Polaris make all-terrain vehicles (ATVs), snowmobiles and motorcycles and markets them — together with related replacement parts, garments and accessories — through dealers and distributors principally located in the United States, Canada and Europe. Its primary competitors include Arctic Cat (ACAT) , Bombardier and Honda Motors (HMC - Annual Report) .

Polaris shares are down 20% over the last year, as investors appear to expect a slowdown in sales and profits. Yet those metrics are rising. Second-quarter sales were up 21%, and earnings were up 16% compared to last year. The earnings beat the consensus estimate by 4 cents, and the company raised its full-year guidance by a similar amount.

Polaris’ strength is being driven by sales of ATVs, which account for two-thirds of total revenue. In particular, the company’s popular Ranger and RZR brands of multi-passenger “side-by-side” ATVs have given the company the top market share in that category. Polaris grew sales of its side-by-sides by more than 50% in the latest quarter, even as the overall ATV industry has been essentially flat. On the recent conference call, investors heard that channel checks indicate continued supply shortages. With the hot side-by-side ATVs in short supply, moderating sales would simply bring supply and demand into balance.

Over the last 12 months, Polaris generated $140 million in free cash flow, measured as cash flow from operating activity less capital expenditures. At 9.8% of the company’s market capitalization, the cash-flow yield represents a healthy premium to the yield on five-year Treasuries. The company has been using its free cash flow to pay out a healthy dividend (the yield is now 3.5%, itself comparable to the Treasury yield) and to buy back shares. From nearly 44 million diluted shares in 2005, the share count has been reduced by nearly a quarter, to less than 34 million today.

Analysts expect the company to grow earnings by 12% per year over the next three to five years, a rate that is well below the rate that can be sustained given the company’s high returns on equity. I think the estimate is a reasonable one. If growth remains in double-digits, as I suspect, then investors won’t continue to require such a high free-cash-flow yield from the stock. Even at a 7% yield, the risk premium over Treasuries would be 100%, a level often cited by value investors as a target premium.

If free cash flow per share rose by 12% next year, and the shares were priced for a 7% free-cash-flow yield, the resulting $65 share price would represent nearly a 48% premium from the current level. Even if it took five years for the valuation to adjust to a 7% yield, total returns would be 15%-20% annually. With that kind of return, I’d be willing to wait for the valuation to correct.

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

This article is a reprint of my 31 July 2008 RealMoney column.

On July 23, J.D. Power & Associates cut its 2008 forecast for new light-vehicle sales and said it now expects U.S. sales to hit a 15-year low this year. The new estimate calls for 750,000 fewer cars to be sold than had been estimated as recently as March.

I’m sure that high gas prices are encouraging marginally more use of alternatives such as car-pooling or public transportation, but I also know from experience that those options are not always viable even if desired. Commuting and work schedules vary widely, so finding someone going your way at the time you need is often all but impossible. So I read the decline in new vehicle sales as a different kind of cost-cutting — namely, keeping a perfectly good older vehicle for a little longer. In other words, the average age of a U.S. vehicle is likely to increase somewhat from the current 9.2 years. And, of course, an aging vehicle requires more repairs. Even cost-conscious consumers may decide it is worthwhile to get the car tuned up and eke out an extra mile per gallon. That, in turn, should benefit companies such as Advance Auto Parts (AAP) , Autozone (AZO) and Genuine Parts (CPC) . Of the three, I believe Advance Auto Parts is best positioned for gains.

Advance Notice

Advance is the second-largest specialty retailer of automotive parts, accessories and maintenance items to “do-it-yourself,” or DIY, and “do-it-for-me,” or DIFM, customers in the U.S. Its stores carry a standard 16,000 stock-keeping units, or SKUs, on hand and can access another 80,000 for overnight delivery. In other words, if you need a part, Advance can get it for you. The company reports earnings on Aug. 7 and is expected to earn 72 cents a share for the quarter, though that really seems to be just a guess. Advance seems to alternate between missing estimates in one quarter and beating the next.

The full-year numbers should be more reliable, however, and on that basis Advance Auto is expected to earn $2.66 in 2008 and $2.92 in 2009. Both of those estimates have been revised higher over the last 90 days. The revisions, which are in the 3% range, compare favorably with a 1% increase in estimates for Autozone over the same time period and shrinking estimates at General Parts.

At 15.6 times the current-year earnings estimate, Advance Auto Parts is trading at the low end of its five-year valuation range (its average P/E has been 18.4 times). If the company earns $2.92 per share next year, as expected, and trades at that average P/E, the shares could appreciate by 30%, to $54.

Click here for larger image.

Source: Zacks Research Wizard, compiled by William A. Trent

Given that Advance has been improving its returns on capital, I believe that, if anything, it now merits an above-average earnings multiple. For one thing, the rising returns on investment lead me to believe that the 13.7% consensus three-to-five-year earnings growth forecast is, if anything, conservative. If the growth forecasts are realized, however, and the company returns to its average P/E after five years, the shares could reach $93, for total annual returns of 17.5%.

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

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This article is a reprint of my 29 July 2008 RealMoney column.

These are tough times for office furniture makers, which have seen their shares fall 20% to 50% over the last year. A difficult economic environment and poor showings from office retailers such as Office Depot (ODP) have investors worried.

Customers, on the other hand, appear relatively unfazed. Last month, Herman Miller (MLHR) kicked off earnings season with a positive surprise. Last week, HNI (HNI) and Knoll (KNL) followed suit. Only Steelcase (SCS) posted disappointing numbers.

The one that looks most attractive to me is Knoll. The company managed to grow sales by 7.5% compared with last year, and its backlog grew at an even faster 9.7% rate. The growth is significantly higher than that of the industry, which is basically flat. Andrew Cogan, Knoll’s CEO, said, “The strategy we embarked on earlier in the decade to diversify our sources of revenue and profits away from a dependence on North American systems sales and to focus on high design content businesses is paying off in a challenging macro-economic environment.”

Better still, it seems that investors haven’t fully grasped the significance of Knoll’s strategic shift. The stock, which traded at $24 little more than one year ago, rallied after the earnings report but remains well off those highs. Analysts are expecting full-year growth of just 4.1% this year and 0.8% next year, suggesting a slowdown is imminent when the backlog growth is saying exactly the opposite.

Unbought Guidance

The skepticism is so strong that while 2008 earnings estimates have gone up only 12 cents in the last 90 days, the entire increase is attributable to the positive first- and second-quarter surprises. The raised third-quarter guidance, I suppose, is free. Meanwhile, estimates for 2009 have barely moved and at $1.63 are actually lower than the 2008 estimates. So we have a stock with decent sales growth and a string of positive earnings surprises under its belt trading at a single-digit P/E. That in itself is enough to spark my interest.

That spark becomes a flame when I see that the company generated $90 million in free cash flow over the last 12 months, or 12% of the market capitalization. With Treasuries yielding just 3.4%, the 850 basis-point premium is enough to compensate me for Knoll’s risk even if the cash flow remains stagnant. The cash flow has been put to a variety of good uses, including last year’s acquisition of Teddy & Arthur Edelman Ltd. for $71 million and the return to shareholders of more than $65 million through dividends and buybacks. The share count is 2 million lower (about 4%) than it was one year ago.

As I see it, Knoll should trade at no less than 10 times free cash flow, even if the growth potential is limited. Meanwhile, I believe the cash flow can grow, possibly in line with the recent growth in backlog. Under those circumstances, I believe the market cap could be closer to $1 billion than the current $750 million. That would represent a $21 share price, or 34% appreciation from the current level.

Disclosure: At time of publication, William Trent owns shares of Office Depot (ODP)

William Trent currently has a short position in put options related to Office Depot (ODP).

My latest column is up at RealMoney.

Chart Industries (GTLS) is a leading independent global manufacturer of highly engineered equipment used in the production, storage and end-use of hydrocarbon and industrial gases. As an infrastructure supplier to the energy industry, Chart lies at the intersection of two major investment themes that I think will continue to work for some time.

The advertising bombardment relating to T. Boone Pickens’ “Pickens Plan” can’t hurt Chart. A central component of the plan is to increase the use of natural gas in transportation.

For the Pickens Plan to work, money will have to be spent building out an infrastructure to transport the gas from remote areas to those where it is needed. Enter Chart, which supplies engineered equipment used throughout the global liquid-gas supply chain.

While the Pickens Plan ads may increase awareness of natural gas, Chart has been doing fine without it. Sales grew 24% in 2007, but backlog grew at twice that rate. The current backlog amounts to more than 60% of projected 2008 sales, offering high visibility.

What’s more, demand continues to rise. In a recent note, Lehman Brothers estimated that the expansion plans of a single customer (Energy World Corporation) could mean more than $250 million in additional orders for Chart.

For a company that looks like it can generate 20% annual growth, I don’t really require the free-cash-flow yield to be higher than the 3.2% return on five-year Treasury bills. The growth alone is sufficient reward for the risks involved.

Seen another way, the average free-cash-flow yield in the S&P 1500 Supercomposite is about 3.1%, and the average growth forecast is 14%. With Chart, you get higher growth at a lower valuation.

If Chart can grow its cash flow 20% over the next year and increase its valuation so that the free-cash-flow yield matches the Treasury yield, the stock could more than double in that time. That would make for a (stock) chart I could appreciate.

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.

General Dynamics operates through four business groups: aerospace, combat systems, marine systems and information systems and technology. The way I see it, the sum of these parts is greater than the whole.

The aerospace division consists of Gulfstream business jets and accounted for 18% of the company’s sales in 2007. I believe investors have some doubts about whether the pace of private jet sales can be sustained in an economic downturn. Although the company’s backlog extends past 2010, investors are likely to react more strongly to new orders than to shipments from backlog. It’s worth noting, though, that more than half of Gulfstream sales are outside the U.S. Another 35% of revenue accrued to the information systems and technology group, which provides electronics and software primarily used for defense purposes.

Combat systems accounted for 29% of sales and produces a variety of products, most notably the Stryker armored combat vehicle that has been so necessary in Iraq and Afghanistan. Stryker shipments under the current contract wind down in 2009, so the group will likely contribute less to future sales for some time, barring an escalation in combat operations. However, the unit continues to develop new systems and is expanding sales internationally.

As combat systems slow, marine systems seem poised to pick up the slack. In particular, production of Virginia-class submarines is now expected to double to two per year by 2011, one year earlier than previously thought. The unit’s 18% share of 2007 revenue should rise in the years ahead.

Sales forecasts through 2009 are more or less in the bag. The company’s backlog at the end of March was $50 billion, and annual sales are in the $30 billion range. What’s more, both orders and prices for aerospace and defense equipment have been increasing rapidly in the last few months. The backlog looks like it could grow still further.

The company has a strong track record of exceeding earnings expectations, and analysts have been raising their 2008 and 2009 estimates over the last three months. Meanwhile, the stock has fallen more than 15% since mid-May. The current valuation could be a strong buying  opportunity.

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

In the feature, “Sucker’s Rally? Stock Gains Likely to Be Short-Lived” which analyst used the phrase, “sucker’s rally”?

“It’s a sucker’s rally,” Kathy Boyle, president of Chapin Hill Advisors, says of this week’s market move.

In a July 15 CNBC interview, Jim Rogers used which metaphor in discussing a Fannie Mae/Freddie Mac bailout?

Band-aids for cancer.

In the Fast Money post, “No Guts No Glory - Pt. II” what animal metaphor is used to describe value investing?

For her latest amazing feat Finerman puts her head directly into the lion’s mouth.

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