The slump in oil prices continues unabated. Crude prices have fallen in excess of $60 since June to near $45 levels. Now, Societe Generale SA, Bank of America Corporation (BAC) and The Goldman Sachs Group, Inc. (GS) say that prices need to remain around the $40 level during 1H15. This is essential for the oil industry so as to prevent further investment which would add to oversupply.
Gloomy Forecasts Spur Declines
Soceite Generale SA believes that prices will fall below $40 during 1H15. Meanwhile, Goldman Sachs had reduced its three-month price forecast for West Texas Intermediate (“WTI”) to $41 per barrel from $70 and Brent crude price forecast to $42 per barrel from $80. For six-months, WTI price forecasts have dropped to $39 from $75.
Moreover, it has reduced full-year 2015 estimates for WTI and Brent to $47.15 and $50.40 from $73.75 and $83.75 respectively. The investment management firm believes that crude prices should remain low for a long period in order to ease out the supply glut.
Following the projection cuts, WTI crude fell about 5% to $46 per barrel, a six-year low. Brent crude also fell nearly 6% to about $47.
$100 Level Unlikely Again
Prince Alwaleed bin Talal of Saudi Arabia has said that a $100 price for oil may never again be witnessed globally. The Saudi prince has said that countries “were caught off guard” by the steep fall in prices. He added that the decline was a not a result of OPEC’s actions in 2014.
Further, he defended his country’s decision to maintain output at current levels. Meanwhile, in an attempt to increase its presence in the U.S. market, Saudi Aramco, the state oil firm, had lowered crude’s selling price to Northwest Europe by $1.50 for February, the fifth consecutive monthly cut.
Vehicle Sales Increase
The decline in prices has impacted the U.S., especially those companies engaged in production of shale oil though fracking. Stocks such as Chevron Corp. (CVX) and Exxon Mobil (XOM) have taken a pounding. This is expected to continue, with Texas in particular expected to slip into a recession in the near future.
However, consumers are expected to benefit from a decline in oil prices. Given the fact that 70% of the country’s GDP is attributable to consumer spending, this phenomenon could result in an increase of 1% in GDP. This is because discretionary spending will increase.
Auto sales may already have picked up due to the slump in oil prices. Car sales in 2014 increased 5.9% for the industry as a whole. According to WardsAuto.com, it has also caused consumers to opt for cars which have lower fuel efficiency. In 2014, trucks and SUVs contributed 52.1% of total vehicle sales. This is a significant increase over the 47.3% witnessed in 2009.
Additionally, average fuel economy for light vehicles is on the decline. This metric has declined to 24.7 miles per gallon (MPG) in December, the lowest level recorded since 2013. In 2014’s spring average fuel economy had touched a high point which was in excess of 25 MPGs.
Transportation Companies to Benefit
Fuel costs account for a considerable portion of expenses of trucking companies. The U.S. trucking industry is currently poised to benefit from two ways. Lower oil prices will reduce their operating expenditure, thereby boosting the bottom-line. On the other hand, capacity constraint in the form of driver shortage and new government regulations will drive top-line growth.
A decline in oil prices is probably even more crucial for airlines. Lower jet fuel prices have been a boon for the airline industry given the inversely proportional relation between crude prices and the value of aviation stocks. This has benefited airline stocks immensely as the cut in oil prices has reduced their operating expenses significantly, thereby aiding the bottom line.
Our Choices
Below we present three stocks which will gain from these trends, each of which also has a good Zacks Rank.
Celadon Group Inc. (CGI) is primarily a trucking company which has two operating segments. Celadon has two operating segments, the asset-based segment and an asset-light segment. The asset-based segment provides dry van carrier and rail services. The asset-light segment offers warehousing, brokerage and less-load-services.
Celadon Group holds a Zacks Rank #1 (Strong Buy) and has expected earnings growth of 40%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 17.35.
American Airlines Group Inc. (AAL) provides scheduled jet services across North America, the Caribbean and certain other foreign destinations. The airline operated around 6,700 flights per day to around 339 destinations on an average across Oct 22, 2014. Founded in 1934, American Airlines was headquartered in Fort Worth, Texas.
Apart from a Zacks Rank #1 (Strong Buy), the company has expected earnings growth of 63.5% for the next year. It has a P/E (F1) of 5.32x.
PACCAR Inc. (PCAR) is the third-largest manufacturer of heavy-duty trucks (with a capacity of more than 15 metric tons) in the world after Volvo and Daimler. PACCAR has substantial manufacturing exposure to light/medium trucks (with a capacity of 6-15 metric tons). Out of overall truck sales, roughly 61.9% are attributable to the U.S. and Canada.
PACCAR holds a Zacks Rank #2 (Buy) and has expected earnings growth of 8.3%. It has a P/E (F1) of 15.18x.
Current projections suggest that $40 levels are likely during the first half of this year. This would greatly benefit consumers and certain industrial sectors. Given these factors, adding these stocks to your portfolio would be a prudent decision.
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