Profit from Falling Oil Prices with These Stocks
Moving people and things from point A to point B is big business. And right now - whether it's by plane, train or automobile - business is good.
Thanks in large part to an improving economy and cratering oil prices, the transportation industry has been one of the hottest this year.
And there still appears to be plenty of gas left in the tank for these stocks.
Airlines Soaring
Warren Buffett once called airlines a 'death trap' for investors, but this year they have been anything but. Airline stocks have soared as fuel prices has fallen and demand for air travel has risen amid an improving labor market.
Fuel is often the number one expense for airlines. It's also one of the most volatile. So the recent collapse in oil prices has provided a huge tail wind for these firms.
While it's true that most airlines hedge at least some of their fuel costs, most should still continue to benefit immensely from falling oil prices.
First, most airlines don't hedge anywhere near 100% of their fuel needs. In fact, many airlines have reduced their hedging this year (American Airlines (AAL) has stopped hedging altogether).
Second, many airlines use call options to hedge the risk of rising oil. So this doesn't obligate them to buy at higher prices should oil prices fall, and they only lose money on the cost of the option itself.
Additionally, many airlines can lock in today's low oil prices with new hedges that will benefit them in future periods should oil prices rise.
And while some worry about lower fuel costs increasing capacity in the industry, total airline industry domestic capacity growth is expected to be a relatively modest 4% in 2015, according to industry experts. That should help keep ticket prices high.
So, all-in-all, falling oil prices are a major tailwind for most airlines.
And it's not just airlines that are benefiting from cheaper fuel costs and limited capacity. The trucking industry is profiting too.
Trucking Ahead
It shouldn't come as a surprise to anyone with a car that fuel costs are also a major expense for many trucking companies. And while some of these companies hedge a portion of their fuel needs like airlines, or add on a fuel surcharge to customers, most are still well-positioned to benefit from falling oil prices.
Another potential tailwind for the trucking industry is a major capacity constraint, which should lead to higher prices and higher utilization rates over time, according to many industry analysts.
Perhaps the biggest reason for the coming capacity constraint is the growing shortage of truck drivers. Another factor that could keep capacity limited is increased federal regulation.
A slew of federal laws and federally mandated rules and regulations are expected to come down the pike over the next few of years, possibly requiring electronic logging devices, a national clearinghouse for drug and alcohol test results, stiffer greenhouse emission standards, higher liability insurance minimums and mandated stability control systems in trucks.
These high regulatory hurdles create increased barriers to entry, thereby restricting new competition and keeping prices - and profits - high for existing firms.
4 Transportation Stocks to Consider
So what are some attractive companies within the Transportation industry?
Here are four:
Alaska Air Group (ALK)
Alaska Air Group is the holding company for Alaska Airlines and Horizon Air, which collectively serve over 90 destinations in North America. The company does hedge some of its fuel costs, but all future oil hedges are call options, which effectively cap fuel prices while still allowing it to benefit from a decline in prices. Approximately 35% of expected fuel requirements in 2015 were hedged at the end of Q3.
Earnings estimates have soared for Alaska Air Group this year, along with the stock price, as it has delivered five consecutive positive earnings surprises. It is a Zacks Rank #2 (Buy) stock.
Spirit Airlines (SAVE)
Spirit Airlines is a low-cost airline headquartered in Miramar, Florida that offers affordable travel to price-conscious customers. It operates more than 280 daily flights to over 55 destinations in the United States, the Caribbean and Latin America. At the end of Q3, the company had hedged approximately 29.2% of its expected fuel needs for the fourth quarter 2014 and first quarter 2015. So Spirit should greatly benefit from falling oil prices.
Earnings estimates continue to soar for Spirit for both 2014 and 2015. It is a Zacks Rank #1 (Strong Buy).
Old Dominion Freight Line (ODFL)
Old Dominion Freight Line is a less-than-truckload multi-regional motor carrier that provides direct service throughout the continental United States. The company does not hedge against rising fuel costs, but it does collect a fuel surcharge from customers. However, this doesn't fully cover its fuel expenses, which represent the largest component of its operating expenses. This has helped Old Dominion to expand its profit margins this year.
Consensus estimates have risen sharply for Old Dominion as it has delivered three straight earnings beats. It is a Zacks Rank #2 (Buy) stock.
Knight Transportation (KNX)
Knight Transportation is a truckload carrier that offers dry van, refrigerated, and brokerage services to customers throughout the United States. It primarily transports consumer staples, retail, paper products, packaging/plastics, manufacturing, and import/export commodities. Like Old Dominion, Knight does not hedge its fuel costs but does have a fuel surcharge program that it collects from its customers. However, this surcharge does not cover all of its fuel costs, so it should still benefit overall from falling oil prices.
Consensus estimates have been surging for Knight over the last several months as it has delivered four consecutive positive earnings surprises. It is a Zacks Rank #1 (Strong Buy) stock.
The Bottom Line
Amid falling oil prices, an improving economy, and restricted capacity, the transportation industry has been one of the hottest this year. And these four transportation stocks have plenty of fuel left in the tank to continue soaring.
Todd Bunton, CFA is a Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor and Surprise Trader services.
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AMER AIRLINES (AAL): Free Stock Analysis Report
ALASKA AIR GRP (ALK): Free Stock Analysis Report
KNIGHT TRANSN (KNX): Free Stock Analysis Report
OLD DOMINION FL (ODFL): Free Stock Analysis Report
SPIRIT AIRLINES (SAVE): Free Stock Analysis Report
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