Still, not all companies benefit from higher oil prices. Some suffer significantly when oil is expensive. However, when oil is cheap, these companies can outperform, making them the ones investors want to own.
FedEx Corporation (NYSE:FDX), J.B. Hunt Transport Services, Inc. (NASDAQ:JBHT), and Delta Air Lines, Inc. (NYSE:DAL) are three stocks that should outperform if oil drops.
FedEx benefits from cheaper fuel
FedEx Corporation (NYSE:FDX)’s business — shipping packages around the globe — consumes a lot of fuel. Over the last five years, jet fuel has cost the company about 8%-9% of its annual revenue.
Notably, in fiscal year 2010, when oil prices dropped to historic lows in the wake of the financial crisis, jet fuel costs fell to less than 7% of FedEx Corporation (NYSE:FDX)’s revenue.
FedEx Corporation (NYSE:FDX) does pass some of its fuel costs on to its customers in the form of a fuel surcharge. However, when this surcharge is low, consumers are probably more likely to do business with the company, thereby benefiting FedEx Corporation (NYSE:FDX).
J.B. Hunt is a major trucking firm
Like FedEx, J.B. Hunt Transport Services, Inc. (NASDAQ:JBHT) is a shipping company. Specifically, it’s one of the largest trucking companies in North America, and has a fleet of over 12,000 trucks.
In the second quarter, fuel costs were equal to 8% of its revenue, down from 9% the prior year.
J.B. Hunt Transport Services, Inc. (NASDAQ:JBHT) does not hedge its fuel costs, instead imposing a fuel surcharge on its customers. The company says that most of the burden of higher fuel prices is ultimately returned to the company, through the surcharge, but not all of it. Idled and empty trucks can weigh on the company’s bottom line.
Moreover, as with FedEx, a higher surcharge means higher shipping costs. That could discourage would-be customers and reduce J.B. Hunt Transport Services, Inc. (NASDAQ:JBHT)’s revenue.
Delta Air Lines benefits from cheaper jet fuel
Given the numerous bankruptcies over the years, investors may be tempted to avoid airline stocks altogether. For investors with a longer horizon, that may be for the best; however, airline stocks can do well when oil prices are falling.
In its annual filing, Delta Air Lines, Inc. (NYSE:DAL) explicitly notes:
Our results of operations are significantly impacted by changes in the price and availability of aircraft fuel.
For the last two years, jet fuel has accounted for 36% of Delta Air Lines, Inc. (NYSE:DAL)’s operating expenses. In 2010 — when oil prices were low — it accounted for 30%. Delta Air Lines, Inc. (NYSE:DAL) buys fuel on contracts, and does engage in some hedging; still, the company benefits from lower oil prices.
As with FedEx and J.B. Hunt Transport Services, Inc. (NASDAQ:JBHT), Delta Air Lines, Inc. (NYSE:DAL) does best when it doesn’t have to pass on the higher price of fuel to its customers. When jet fuel is expensive, plane tickets are expensive, and would-be travelers may seek alternative methods of transportation, or just stay home.
Why oil prices could collapse
Business Insider notes that Deutsche Bank has its eye on a number of factors that could send the price of oil lower:
- More oil coming from the U.S. New drilling methods have increased oil production in the U.S. significantly in recent years.
- An economic slowdown in China or the U.S. could reduce the demand for oil
- A resolution of crisis in the Middle East, including a more favorable Iranian regime, should alleviate supply concerns.
The first and third factors should benefit companies like Delta, FedEx and J.B. Hunt. Oil companies might not like it, but transporters should see their business strengthen as oil prices fall.
However, if oil prices drop on falling demand — an economic crash in China or the U.S. — investors won’t find safety in the aforementioned stocks. FedEx and J.B. Hunt won’t have much to ship even if the cost of their shipping is low, and Delta won’t be able to service many tourists and business travelers when the economy is struggling.
Investing for an oil decline
If Deutsche Bank is right, and oil prices are about to take a dive, investors should consider adding some transport stocks like FedEx, J.B. Hunt, and Delta Air Lines to their portfolio.
Of course, if oil is dropping because the economy is collapsing, these stocks won’t offer much safety. However, if oil’s decline is due to other factors (a reduction of conflict in the Middle East, more U.S.-based supply), these companies — and their investors — should benefit.
The article Stocks to Own for an Oil Price Collapse originally appeared on Fool.com and is written by Sam Mattera.
Joe Kurtz has no position in any stocks mentioned. The Motley Fool recommends FedEx. Sam is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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