6 Stocks Benefiting From Lower Gas Prices

BOSTON ( TheStreet) -- Prices at the gas pump have tumbled 14% since April thanks to lower crude oil prices, which bodes well for a handful of companies' stocks, a couple of the domestic oil industry's biggest players, and four niche retailers that typically benefit from low- and middle-income consumers efforts to trim spending in uncertain economic times.

Many may find it hard to believe, but the average price for regular gasoline at U.S. filling stations is down about 20% from last summer, at a current average price of $3.41 per gallon nationally, according to The Lundberg Survey, and well off the high this year of $3.97 per gallon reached on April 6.

S&P Capital IQ analysts recently took a look at what companies are likely to prosper in this environment and came up with six picks.

Given the price sensitivities of the industry, earnings of integrated oil and gas companies -- that is those involved in everything from exploration and production to refining and marketing -- are expected to jump. As a result, their shares are up an average 27.3% this year, three times that of the S&P 500's 9.1% gain, making it one of the best-performing industry sub-sectors S&P tracks.

That gain is a result of the curious vagaries of oil industry pricing that clearly favor the seller.

"When crude prices are rising, pump prices will likely go up faster," said S&P Capital IQ equity analyst Michael Kay. "On the way down, retailers will likely take longer to cut pump prices because the gasoline was purchased at a higher price and many stations want to charge more than what they paid. However, if crude keeps falling, we think gasoline prices will likely follow."

Not surprisingly, two oil industry leaders that have all the bases covered given their balance between exploration and production and refining and marketing assets: Chevron ( CVX) and ExxonMobil ( XOM). These are top stock picks of analysts with at least nine "buy" ratings each.

"We think in a time of volatile energy prices, Exxon and Chevron shares provide some stability versus pure upstream or downstream plays," wrote Kay, in a July 11 report.

He expects both firm's will continue to generate strong cash flow, which should result in dividend hikes and share buybacks.

Lower gas prices have traditionally resulted in increased travel on the part of most Americans, who in lieu of spending on a new car when their job future is unsure, keep the family chariot longer. This trend is seen helping two auto parts retailers, O'Reilly Automotive ( ORLY) and Advance Auto Parts ( AAP).


"Given the notable decline in gasoline prices since April, we expect miles driven to increase over the coming months, which in turn should lead to increasing vehicular repairs in the back half of the year," said Michael Souers, an S&P Capital IQ analyst, who has "buy" recommendations on the two firms.

And finally two deep discount retailers, Dollar Tree ( DLTR) and Family Dollar Stores ( FDO) are seen benefiting from lower gas prices, since a significant portion of spending on the part of lower income consumers is on gas, so the money saved there can be spent elsewhere. Given the economic uncertainties facing so many, they are likely to turn to discount retailers for general merchandise and food items, according to S&P Capital IQ equity analyst Joseph Agnese, who has "buy" recommendations on both firms.

Investors are taking note of that as Dollar Tree's shares are up 27% this year, while Family Dollar's are up 18%.

Here then are summaries of six stocks that S&P Capital IQ says are likely to benefit from the current gas price environment arranged in inverses order of the number of "buy" ratings:

6. Advance Auto Parts ( AAP)

Company Profile: Advanced Auto, with a market value of $5 billion, is a retailer of automotive aftermarket parts, accessories, batteries, and maintenance items. It owns over 3,000 retail parts stores.

Dividend Yield: 0.34%

Investor Takeaway: Shares are up 3% this year, after a 20.5% slide over the past three months. They have a three-year, average annual return of 17.2%. S&P's year-end price target is $90, a 26% premium to the current price.

Analysts give its shares four "buy" ratings, four "buy/holds," and 15 "holds," according to a survey of analysts by S&P. Analysts' consensus earnings estimate is for $5.71 per share this year and growth of 13% to $6.48 next year.

5. O'Reilly Automotive ( ORLY)

Company Profile: O'Reilly, with a market value of $12 billion, is the second-largest auto-parts retailer in the U.S., with over 3,700 stores.

Investor Takeaway: Shares are up 14.7% this year and have a three-year, average annual return of 38%.

Analysts give its shares five "buy" ratings, six "buy/holds," 12 "holds," and one "weak holds," according to a survey of analysts by S&P. S&P rates it "buy" and says "we think the shares are attractive at under 16 times our 2013 (earnings per share) estimate, a modest discount to historical averages."

For fiscal year 2012, analysts estimate it will earn $4.62 per share and that that will grow by 14% to $5.27, in 2013.

4. Family Dollar Stores ( FDO)

Company Profile: Family Dollar Stores, with a market value of $8 billion, operates about 6,800 general merchandise discount stores in 44 states. They offer a variety of apparel, food, cleaning supplies, beauty and health products, toys, pet products, and seasonal goods, typically at prices from under $1 to $10. The chain targets low- and middle-income consumers.

Dividend Yield: 1.2%

Investor Takeaway: Its shares are up 18% this year, and have a three-year, average annual return of 32%.

Analysts give its shares six "buy" ratings, seven "buy/holds," 11 "holds," and two "weak holds," according to a survey of analysts by S&P.


S&P has its "buy" rated, upgrading it from "hold," on June 26, and has a $79 price target on its shares, which is an 18% premium to the current price. S&P analysts write that although its customer base of lower income families are expected to spend less in the near term, "we believe the company is well positioned to drive increases in both customer traffic and average customer transaction value with its growing consumables assortment and planned increases in national brand and private label offerings."

It has also recently expanded its food assortment to include refrigerated foods and quick-prep and ready-to-eat products. Analysts' consensus estimate is for earnings of $3.65 per share this year, and growing 16% to $4.24 next year.

3. Dollar Tree ( DLTR)

Company Profile: Dollar Tree, with a market value of $12 billion, offer a variety of consumable merchandise, including candy and food, general merchandise and seasonal goods--all for $1. It has about 4,350 stores in North America.

Investor Takeaway: Its shares are up 27% this year, including 10% in the past three months, and have a three-year, average annual return of 54%.

Analysts give its shares eight "buy" ratings, five "buy/holds," 9 "holds," one "weak hold," and one "sell," according to a survey of analysts by S&P. S&P has a "sell" rating on it based on valuation concerns, otherwise it's upbeat on its long-term outlook.

Dollar Tree has benefited significantly from the prolonged recession and the challenge it faces now is whether it can hold on to the customers it gained because of the poor economy when it improves. In its current fiscal year, it's expected to earn $2.48 per share and that that will grow by 15% to $2.84 per share the following year.

2. ExxonMobil ( XOM)

Company Profile: ExxonMobil, with a market value of $400 billion, is an integrated oil and gas company that explores for, produces, and refines oil around the world. It is the world's largest refiner and one of the world's largest manufacturers of commodity and specialty chemicals.

Dividend Yield: 2.6%

Investor Takeaway: Its shares are up 2% this year, including 3.7% in the past three months, and is up an average 11% annually over a three-year period.

S&P has it rated "strong buy," with a $103 price target, which is a 21% premium to its current price. Analysts give its shares nine "buy" ratings, three "buy/holds," and eight "holds," according to a survey of analysts by S&P.

S&P Capital IQ analyst Michael Kay says "Exxon is one of the largest and most efficient refiners in the world, in our opinion. Its refineries are very advanced, providing it with a low cost structure and high profitability. And the company's massive exposure to the higher margin/higher growth upstream segment should allow it to absorb any weakness in demand."

Analysts' consensus estimate is for earnings of $7.92 per share this year, and growing by 8% to $8.57 next year.

1. Chevron ( CVX)

Company Profile: Chevron, with a market value of $209 billion, is the second-largest oil company in the U.S and one of the largest integrated energy companies in the world with exploration, production, and refining operations worldwide.

Dividend Yield: 3.4%

Investor Takeaway: Its shares are up 1.2% this year, including 6% in the past three months. They have a three-year, average annual return of 23%. S&P analysts have it rated "strong buy" with a year-end price target of $132, which is a 25% premium to the current price.

Analysts give its shares 10 "buy" ratings, six "buy/holds," and four "holds," according to a survey of analysts by S&P. It's diversifying its product mix to include oil shale and liquefied natural gas projects to position itself as a leader in emerging Asia-Pacific markets, and analyst Kay says the company "has been reducing its refining footprint over the last several years, which would help mitigate the impact of any decline in gasoline demand or narrowing refining margins."

It's expected to earn $12.71 per share this year by analysts.
Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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