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Lower oil prices lifts many boats. Here are the ones to buy.
While the pundits argue over the real cause of the collapse in oil prices, the rest of us are trying to figure out what sectors are going to experience positive impact from the declining price of the black gold.
Almost every aspect of our economy is tied to oil prices. Not only do costs for many businesses go down, since they don’t have to pay as much for deliveries or transport of goods, but things like heating costs also go down. Consumers end up with a bit more money in their pockets since they don’t have to spend so much on gasoline.
In short, the first places to look are sectors where anything moves.
Airlines are the obvious choice. Fuel is a massive expense for the airlines. Even better (unless you’re a frequent flyer), the airlines don’t necessarily reduce ticket prices just because fuel prices fall. As long as demand exists for travel, they’ll keep those prices right where they are. Which airline do you buy? Let’s look at valuation.
American Airlines (Nasdaq: AAL) isn’t in fantastic shape, but it’s doing okay. $8.8 billion in cash is offset by $15.6 billion in debt. Free cash flow (FCF), however, is negative in the trailing 12 months (TTM) by $3.7 billion.
United Air Lines’ (NYSE: UAL) FCF situation isn’t much better. It was $700 million in the red in FY13, on top of $1 billion the year before, but has generated $350 million in the TTM. $5.6 billion in cash is offset by $10.6 billion in debt.
Delta Air lines (NYSE: DAL) is in decent shape, with $4.5 billion in cash, and $9 billion in debt. It is generating positive FCF, to the tune of $3 billion in the TTM.
JetBlue (NASDAQ: JBLU) squeezes out a little FCF each year, about $140 million pretty consistently, and $50 million in the TTM. $450 million in cash is offset by $2.1 billion in debt.
Hawaiian Holdings (NASDAQ: HA) is holding its own, with small degrees of negative cash flow ($190 million). $600 million in cash is offset by $885 million in debt. I’m also very down on their customer service lately, so I’d avoid them.
That brings us to the perennial winner in the sector. Southwest Airlines (NYSE: LUV) always had a good balance sheet and cash flow. It now has $3.6 billion in cash and only $2.1 billion in debt, with $350 million to $1 billion of FCF annually, and $1.2 billion in the TTM. If you can only afford to buy one airline stock, I’d go with this one.
The transportation sector will see a big lift, since fuel is what these companies are all about. There are two go-to plays here: FedEx (NYSE: FDX) and UPS (NYSE: UPS). Neither is a bad choice, and as a virtual duopoly, you really want to own one of them.
Fedex has $2.4 billion in cash and $4.7 billion in debt. It generates $800 million to $1.3 billion of FCF every year, and that should now move higher. It trades at 20 times Fiscal-Year 2014 estimates.
UPS trades at 22 times estimates, and is growing a bit slower. It has $6.3 billion in cash and $9.9 billion in debt. However, it generates $5 billion in FCF on a regular basis. Despite this great cash flow, though, I think Fedex is the better value.
My last sector choice may surprise you. You know who else will benefit from these lower prices? The oil producers and explorers themselves. Really. The reason is that now you can buy these stocks on sale. This dip in oil prices is likely to be something that is a medium-term problem.
The world will always need oil. The biggest companies – the legacy brand names – are going to survive this short-term price dip and prosper as they always have.
That’s why I think you should consider buying the Energy Select SPDR ETF (NYSE: XLE), and get a basket of the big names.
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