Let’s talk about fuel, specifically, let’s talk about petrofuels. Prices spiked to more than $120 per barrel in June, but are down to approximately $90 per barrel now. Slowing demand from both industry and retail consumers, likely due to the technical recession of 1H22, is putting downward pressure on prices. You’re likely familiar with at least one immediate effect, the 80-cent drop in gasoline prices over the past 6 weeks. These and other effects are starting to ripple through the economy.
Jim Cramer, the well-known host of CNBC’s ‘Mad Money’ program, has taken note, and he’s recommending that investors start beefing up their portfolios. “Oil’s down big, gasoline’s down big and you can now buy all sorts of stocks that benefit from cheaper fuel,” Cramer noted.
On the Street, the professional analysts are pointing out transportation-related equities that stand to gain from lower fuel costs. Airlines, trucking companies, and parcel delivery – all these use fuel, and a breathing space as prices fall from June’s peak prices will benefit their margins. Using TipRanks’ database, we pinpointed three analyst picks in these industries, to get a better idea of how this might play out.
Southwest Airlines (LUV)
Southwest Airlines has long held a leading position among the low-cost carriers, and has built a reputation for quality customer service in an industry that takes more than its share of lumps from the public. A look at the company’s income and revenue trends for the last two years will show how this reputation has benefited the airline – the pandemic caused a deep negative, that moderated in 2021, and has returned to the positive in 2Q22.
We can look into those recently quarterly numbers, and find that Southwest hit $6.7 billion at the top line for 2Q22. This was a quarterly record for the company, and came along with a net income of $825 million, or $1.30 per diluted share. The comparable numbers for 2Q21 were $4 billion at the top line and a net EPS loss of 35 cents. Compared to the pre-pandemic 2Q19, revenues are up more than 13% and net income is up 11%.
Southwest has been working to modernize its carrier fleet, and has procured additional MAX aircraft from Boeing. These acquisitions have improved the company’s fuel efficiency by 2.1% overall. However, the deliveries from Boeing are lagging expectations, and the company forecasts receiving a total of 66 new airliners this year, instead of the 114 ordered. Southwest estimates it will finish the year with 765 active aircraft.
All of that was enough for Morgan Stanley analyst Ravi Shanker to make Southwest one of his Top Picks in the airline sector, and to set an Overweight (i.e. Buy) rating on the shares. His $65 price target indicates room for ~68% share appreciation in the coming year. (To watch Shanker’s track record, click here)
Backing his stance, Shanker wrote: "LUV has been the best-performing airline stock (in our coverage) YTD as the market has sought safety in domestic exposure and quality but we think the stock is trading at least 40% below normalized value here (~10x PE on 2023 EPS).We continue to like the idiosyncratic catalysts and quality of management and BS, which we think makes LUV the best house on a very attractively priced block."
Overall, it’s clear that Wall Street likes what it sees in this airline. LUV shares have 13 recent analyst reviews, and these include 11 Buys against 2 Holds for a Strong Buy consensus rating. The stock is selling for $38.79 and its $52.46 average price target implies a 35% one-year upside. (See Southwest stock forecast on TipRanks)
Knight-Swift Transportation (KNX)
For the second stock, we’ll take a look at one of North America’s major trucking companies, Knight-Swift. This firm operates through a network of subsidiaries, and offers services in a variety of trucking segments, including mid- to long-haul and less-than-truckload. Taken together, Knight-Swift’s subsidiaries operate out of 25 shipping terminals with a fleet of more than 4,000 trucks and 11,000 trailers.
Knight-Swift reported its 2Q22 results last month, and the numbers looked good for the company. At the top line, total revenues of $1.96 billion were up 49% year-over-year, and the strong gains powered gains in net income. The company’s operating income grew 70% y/y, from $191 million to $325 million. At the per-share level, adjusted EPS was up 43%, from 98 cents to $1.41. EPS also came in ahead of the $1.35 forecast.
Looking forward, management revised their full-year 2022 EPS guidance upward, to the range $5.30 to $5.45 per share. This is an increase of 7.5 cents at the midline.
All of this caught the attention of Morgan Stanley's Ravi Shanker, who says of Knight-Swift: "Every segment at KNX beat MSe in 2Q and while FY guidance understandably includes commentary pointing to slowing market conditions including pricing, this should be a positive as this is better than other companies where management teams are still bullish on 2H (leading to risk to numbers)."
"The stock continues to price in a floor of ~$2 (roughly where it bottomed in the 2019 downturn) when it is clear that the cycle is no longer the same cycle and KNX is no longer the same company as 3 years ago. Earnings power is structurally higher and we believe the market will be forced to acknowledge this as the downturn plays out over the next 2-3 quarters," the analyst added.
Shanker describes Knight-Swift as one of his Top Picks, with an Overweight (i.e. Buy) rating and a price target of $85. That target suggests a 12-month gain of 58% for the stock. (To watch Shanker’s track record, click here)
Overall, no fewer than 13 analysts have weighed in on KNX shares, giving them 11 Buys, 1 Hold, and 1 Sell for a Strong Buy consensus rating. The average price target of $62.27 implies ~16% gain from the current trading price of $53.62. (See KNX stock forecast on TipRanks)
FedEx Corporation (FDX)
Last but not least is FedEx, one of the world’s major delivery and shipping companies. FedEx operates globally, delivering everything from letters and small parcels to business and corporate packages. The company operates with private individuals, retailers, and enterprise customers off all sizes, and is one of the major competitors to public postal systems worldwide.
FedEx has seen its revenues and earnings climbing for the past two years, especially since the pandemic began to recede. The company has just completed its fiscal year 2022 and reported Q4 numbers, showing $24.4 billion in top line revenue, an 8% gain year-over-year. Operating income rose from $1.36 billion to $1.80 billion, and adjusted non-GAAP EPS jumped from $5.01 to $6.87, a hefty increase of 37%.
These solid gains gave the company the confidence to increase its regular share dividend by 53 cents, from 75 cents per share to $1.15. At the new rate, the dividend annualizes to $4.60 per common share and yields ~2%, bringing it in line with average dividend yields of S&P listed firms.
5-star analyst Ariel Rosa, from Credit Suisse, writes of FedEx and its prospects: “While concerns about the economic cycle are understandable given the challenging macro-environment, we are inclined towards an optimistic view on the company’s ability to meet its outlook, as in the process of setting its targets, management had the ability to define the benchmarks against which it will be measured over the next several years... With changes to its executive compensation plan focused on better aligning management and shareholder interests, we are encouraged by FedEx’s efforts to advance a ‘win-win’ agenda.”
Rosa goes on to give FDX stock an Outperform (i.e. Buy) rating, with a $314 price target that implies a one-year upside potential of ~33%. (To watch Rosa’s track record, click here)
Major companies like FedEx always pick up plenty of analyst attention, and there are 21 reviews here from the Wall Street pros. These include 16 Buys against 5 Holds, giving FDX its Strong Buy consensus rating. The stock sells for $236.10 and has an average price target of $292.05, suggesting ~24% upside potential for the next year. (See FedEx stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.