Oil's Impact on 5 Transport Stocks

MINNEAPOLIS (Stockpickr) -- With crude oil still above $110 per barrel, the concern for many is the impact on the consumer. That makes sense since the U.S. is a consumer-driven economy. Weakness on the consumer level could have huge negative consequences for this fragile recovery.

As such, the headlines tend to focus on things such as $4-per-gallon gasoline and the behavior changes that come with that price tag. We know that fewer long-distance trips will be taken this summer as a result. In addition, expect a big increase in demand for public transportation.

But what about the impact of higher oil prices on corporations? So far this earnings season, the early returns suggest that most publicly traded companies are beating expectations. That said, there are a few cracks in the recovery story.

Related: How to Trade Big-Name Oil Stocks

For example, Hooker Furniture ( HOFT) cited rising transportation costs negatively impacting its operating results. Shares dropped more than 5% after its report. Clearly there is a developing story here, and with oil reaching new highs each week, margins are likely to be lower going forward.
Plane

The transportation industry is rushing to transfer the expense to its customers, as evidenced by the Hooker report. Airlines are adding ticket surcharges seemingly every other week. For now transferring the cost of oil to the end user is working. How long that will last is anyone's guess.

The answer is critical for those investing in the transportation sector. Here's my take on five stocks in the industry.

Delta Airlines

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The airline industry finally has a clue about capacity. In the old days, economic expansion was greeted by orders for new aircraft. Almost always, the industry overestimated demand.

As a result, planes flew less than full and at a big loss. This economic expansion is different. This time around there has been little expansion of fleets. Planes are flying full, and profits are expected to be large.

Then oil prices race above $110 per barrel. There go the profits, or so goes the theory. Airline stocks have been some of the biggest losers in 2011. Shares have lost more than 20% in many cases. Delta Airlines ( DAL) reported earnings last week that suggest the selling may be a bit overdone. With some of the oil risk properly hedged, the negative impact of higher oil is not as bad as feared. More important, Delta has had success adding ticket surcharges to offset higher oil prices. It can only do this because planes are flying full.

The company beat earnings estimates, losing less money than expected. As a result of that news shares have of Delta have soared by 20% since the report was released. This stock is still a buy at these discounted prices, even with relatively high oil prices.

Delta was highlighted recently as one of 3 Airline Stocks That Could Double.

Southwest Airlines

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The little airline that could has become quite the juggernaut in the market. Southwest Airline's ( LUV) single-haul approach to flying with minimal frills and low prices continues to be popular. Keeping those discounts despite high oil prices is the big challenge for the airline.

Recently there is another chink in the armor of Southwest. A blown-out fuselage in flight may negatively impact demand and took the attention away from the challenges of operating with higher oil prices. Safety in flight is a much bigger concern. If the company can't properly handle the issue with quality improvements or fixes of its fleet, sales will fall.

The timing could not be worse. Southwest needs full planes to fly with low prices and high oil prices. Thus far the company seems to be navigating the crisis without much negative PR.

Shares of Southwest have been doing relatively well over the last three months compared with other carries in the industry. For example, during the last three months shares of Southwest have traded flat. During the same period, Delta Airlines was down approximately 10%.

Southwest reported earnings for the first quarter that met expectations. The small profit of 3 cents a share in a difficult operating environment is commendable, but investors reacted with a yawn. Shares moved only slightly higher since the news was released on Thursday, April 21.

I would avoid Southwest shares at current prices. The risks associated with the safety of its fleet are too big to ignore. At the same time, a deep discount business model during tight supply and rising operating costs may hurt Southwest more relative to its competition. For the first time in a long time, the larger airline companies may be better positioned in such an environment.

Southewest, one of TheStreet Ratings' top-rated airline industry stocks, shows up on recent lists of 6 Airline Stocks With Top Buy Ratings and 10 Stocks Analysts Are Bullish About.

CSX

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When oil prices go up, transportation options not dependent on oil tend to benefit. One beneficiary of the increase in oil prices is the rail industry. Far better to ship multiple containers by coal fueled trains than in the less efficient and more costly trucking of one container at a time.

Train stocks have reacted inversely to the airline sector. That is to say they have gone up in value as opposed to losing value. For example, train operator CSX ( CSX) has gained more than 10% over the last three months. Are the gains justified?

In addition to benefiting from higher oil prices, the rails have been enjoying the renaissance of a recovering economy. With more economic activity being generated the rails have been on a steady climb higher since the depths of the recession. Profit growth for rail stocks has been fueling stock gains.

CSX is expected to make $5.13 per share in 2011 and $5.96 in 2012. Investors can buy that growth for 15 times the 2011 estimates and 13 times the 2012 numbers. That is neither cheap nor expensive. The risk for investors is what happens when growth slows.

A railroad is not a growth stock. That said, the huge rise in oil prices should make for fertile ground to continue growing at a double digit rate. I would buy CSX with oil hovering around $100 per barrel.

CSX is one of TheStreet Ratings' top-rated railroad stocks.

Old Dominion Freight Line

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If the rails are benefiting from oil price increases, truck companies must really be struggling. It was the rise in oil to $150 per barrel that combined with the beginning of a deep recession decimated the trucking business. Names like Yellow Roadway were pushed to bankruptcy. Old Dominion Freight ( ODFL) was one of the survivors from that ugly period. Its shares have been rallying since bottoming in March of 2009. Surprisingly, that share appreciation has not slowed even with oil at $110 per barrel. Over the last three months shares of Old Dominion have grown by 20%. That is soundly better than the 10% gains for CSX.

A large amount of those three month gains for Old Dominion came after the company reported strong operating results for the first quarter. The company reported earnings in the period of 38 cents per share. Wall Street was looking for 29 cents per share. The results pushed shares up more than 10% the trading day after the news was released.

The market was expecting to see a larger impact of higher oil prices, but there was no mention in the report of the company having difficulty passing along that expense to its customers. Looking forward, Wall Street expects Old Dominion to make $1.81 per share in the current year, with that number growing by 23% to $2.23 in 2012.

I'm skeptical. While the company may be able to pass along higher oil costs to consumers in the near term, doing so over the long haul (pun intended) is another story. The economic recovery is fragile as evidenced by the Federal Reserve recently reducing its own economic forecast.

I would avoid the temptation of buying Old Dominion. Future quarters are likely to be not so rosy.

Old Dominion is one of TheStreet Ratings' top-rated transportation infrastructure stocks.

Ford

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All hail the auto industry, and all hail Ford ( F). The ability of Ford to rise from the ashes of an industry is a wonderful story, especially during these challenging times. The company has taken advantage of weakness in the industry to capture market share. It is even improving its fortunes against the likes of the Japanese carmakers.

One thing that really helped the company was increasing production of its hybrid vehicles. With oil prices at $100 per barrel, Ford is not likely to see decreases in production. The company should not skip a beat even if oil prices continue their ascent.

What may hurt Ford and other carmakers in the short term is the earthquake in Japan. The disruption in manufacturing car parts can put a snag in the whole system. The disruption is likely to result in fewer cars sold.

That is not how Ford sees things. In its recent profit report, the company not only beat Wall Street estimates with strong earnings, but it also stuck to its guns with respect to future production. Ford stated that it did not expect supply chain disruption to impact the number of cars it makes. It maintained its second quarter production prediction of 710,000 vehicles.

In addition, there was little hint by the company that higher oil prices would negatively impact the company. Shares of Ford jumped fifty cents per share after the earnings report, but the stock trades off its high of nearly $19 per share. Once again, investors see things a bit differently than the company.

I would bet on Ford's view at the moment. While higher oil prices and Japan issues are problematic, they are likely to have minimal impact on Ford's profit. In fact, Ford may be a beneficiary of the Japan crisis stealing market share from competitors there. At the moment Wall Street expects the company to grow profits by 7.5% from 2011 to 2012.

That is too low, in my opinion. With the stock trading for just over 8 times 2011 earnings estimates, shares could rally if the company continues to beat expectations. That is how I would play Ford today.

Ford, one of TheStreet Ratings' top-rated automobile stocks, was featured recently as one of 5 Blue-Chip Trades for May.

To see these stocks in action, check out the 5 Plane, Train and Automobile Stocks portfolio on Stockpickr.

-- Written by Jamie Dlugosch in Minneapolis.

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At the time of publication, author had no positions in stocks mentioned.

Jamie Dlugosch is a founder and contributor to
MainStreet Investor and MainStreet Accredited Investor . Formerly, he was president and CEO of Al Frank Asset Management. He has contributed editorially to The Rational Investor , The Prudent Speculator , Penny Stock Winners and InvestorPlace Media .

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