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Photograph of Rhys Moult
The shares of the transport and logistics sectors are expected to fall with soaring energy prices (stocks of airlines fell by about 4% after the weekend bombings in Saudi Arabia), but some stocks in the logistics sector may be attractive as things stabilize.
Amazon.com
(ticker: AMZN) could be an unexpected victim.
Energy futures have taken off after air strikes on Saudi Arabia, OPEC's largest oil producer, have destroyed more than 5 million barrels of crude oil per year. about 5% of global production this Saturday. The Kingdom is striving to put its production back into service as quickly as possible.
Energy is a major expense for truckers, railroads and airlines because it takes a lot of energy to transport goods and people into the economy.
American Airlines
(ticker: AAL), for example, spent more than $ 3.7 billion on jet fuel, more than 16% of sales generated, in the first six months of 2019.
Union Pacific
(UNP), spent $ 1.1 billion, or 10% of sales, on fuel. And
United Parcel Service
(UPS) spent $ 1.6 billion, or about 5% of sales, in the first half of this year.
Large energy exposures make oil prices an important topic for transportation investors. Truckers and rail operators have an easier time passing on fuel costs to their business customers. Most logistics network operators use explicit fuel surcharges to mitigate commodity risks.
"Fuel surcharge revenues totaled $ 399 million, down $ 13 million from 2018," Union Pacific Chief Financial Officer Robert Knight said at the second quarter earnings conference call. Railways and trucking companies generally discuss their profit margins excluding the cost of fuel. Investors therefore tend not to take these expenses into account in their vision of equities.
For railways and truckers, profit margin discussion usually takes place without fuel.
Airlines are having more trouble meeting fuel costs. Airlines are more exposed to energy, and consumer demand for air travel is sensitive to changes in ticket prices.
The good news for airlines, as well as for other logistics service providers, is that everyone in these industries is in the same situation. With the exception of some differences in energy saving and fleet coverage policies, all airlines, railways and truckers pay the same price for energy. Rising prices are not a competitive disadvantage for anyone. If the demand is not affected – and it is serious, energy prices and expenses adjust.
The biggest impact of rising oil prices on transport and logistics could, surprisingly, be felt.
Amazon.com
(AMZN). Rising energy prices always increase the absolute cost required to ship the goods. This concerns lower value items with higher shipping costs per pound. Amazon, through its premium subscription, ships small items at a fixed rate without adjustment for fuel costs.
The company did not immediately respond to a request for comment. The title was down 1.6% in morning trading, while the
Dow Jones Industrial Average
had decreased by 0.3%.
Amazon's strategy operates in a low volatility environment, but volatility, of course, becomes a problem. It's also a problem for the airlines. Large and rapid fluctuations in prices make it difficult to fix ticket prices. Aware of this dynamic, President Donald Trump is trying to offset the excessive volatility of Saudi attacks by making oil available from the US oil reserve.
Any significant reaction in the transport sector could be an opportunity for value investors. American Airlines, for example, is trading about 5 times the estimated profit of next year. Much bad news is already reflected in the course of his actions. Investors worry about labor costs – US machinists work without a contract – as well as slowing demand.
Things may not be resolved quickly, but in the long run, energy prices will probably affect transportation stocks less than some investors think.
Write to Al Root at [email protected]
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