Analysts at Deutsche Bank are out with a note warning that oil prices could soon collapse. That’s great for American drivers, but it might not be the best for the performance of the S&P 500.
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 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.