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5 stocks that'll overcome oil prices
Investors are running from the stocks of companies that depend on oil as its price climbs. But that's creating an opportunity to buy stocks with strong prospects.
By Jim Jubak
Logically, higher energy prices should take a huge bite out of earnings at companies that rely on oil. At Eastman Chemical (EMN, news, msgs), for example, each 1 cent a gallon increase in the price of propane takes 8 cents a share out of earnings. With oil trading near $42 a barrel, youd think this would be the worst time to own shares of chemical companies, fertilizer producers, pesticide manufacturers, tire makers and RV sellers.
In the short-run, with the financial markets fretting over the possibility oil might climb to $45 or even $50 a barrel, thats true. Investors are selling just about every company in every sector that relies on petroleum.
But in the long-run it doesnt pay to treat the companies in any sector as if theyre identical. In fact, Ive found a fertilizer company that's likely to thrive on higher natural gas prices, a recreational vehicle maker with a huge and growing backlog of orders and a tire maker that's building earnings as oil climbs. In each case, investors short-term determination to avoid any company that relies on oil has created a chance to pick up a long-term growth story at a reasonable price.
Spreading fertilizer
Potash Corp. (POT, news, msgs) is the world largest fertilizer company. It's No. 1 in potash, No. 4 in phosphate and No. 3 in nitrogen. That's great, except that producing fertilizer requires big volumes of natural gas, a commodity whose price has soared along with oil.
But Potash should actually see earnings rise with natural gas prices. The company has hedged about 75% of its April through December natural gas needs at $2.30 per million British thermal units. At current prices, the hedge alone is worth about $30 million.
Thats not the companys only cost advantage. CIBC World Markets calculates that the company has the largest low-cost phosphate capacity in the world, adding up to 23% of global potash capacity and about 69% of global excess capacity. Potashs low-cost deposits, plus the companys control of so much of the industrys idle capacity, gives the company strong pricing power in a potash market that's on track to ship record volumes this year. With the increase in ocean freight rates starting to ease and potash prices climbing, the company is projecting higher profit margins for 2004. Wall Street analysts project that earnings per share will climb 127% in 2004 and 36% in 2005. The shares trade at 26 times projected 2004 earnings.
Where the rubber meets the road
Cooper Tire (CTB, news, msgs) would seem to be another must-avoid. After all, todays car tires are built from oil-based rubber and steel, both commodities experiencing big price jumps. And youd expect car owners to cut back on tire purchases if the cost of gassing up cuts into the time spent on the road.
But so far energy costs are having a much bigger effect on the company's stock than its revenues and earnings. Sales of replacement tires, the segment of the tire market that Cooper focuses on, saw sales of light vehicle (passenger cars and light trucks) replacement tires grow by 10% in April from a year earlier. Raw material costs, which have skyrocketed, moderated recently. After climbing 34% from April 2003 to April 2004, the Journal of Commerce commodity index fell 2% from March to April.
Meantime, tire makers have been raising prices to recoup some of those higher costs. Hankook Tire America announced a 3% price increase effective July 1 and Bridgestone/Firestone North America is raising prices on its replacement tires by 5%.
Last quarter, Cooper outpaced the industry growth rate for replacement tire sales, but J.P. Morgan calculates that the stock is selling for just an industry average valuation. Historically, Cooper shares trade at a premium of as much as 50%. The stock trades for 13 times Wall Streets consensus projection for 2004 earnings per share.
Hit the road
Thor Industries' (THO, news, msgs) growing order backlog, at first glance, doesnt make any sense. Shouldnt rising gas prices, let alone rising interest rates, have crushed sales of the gas-guzzling recreational vehicles it makes? Well, they're apparently no match for demographics. An aging population continues to buy RVs for vacations and retirement.
For the companys fiscal third quarter that ended in April, Thor announced a 47% year-to year increase in organic sales, or sales before adding in acquisitions. Its order backlog climbed to record levels and soared 177% from a year earlier. The backlog also climbed 18% from the previous quarter. Dealers always stock up for the peak summer selling season, but theyve been especially aggressive about ordering this year in anticipation of a sales jump as customers accelerate their purchases to beat interest-rate increases.
The stock trades at 16 times projected earnings for the fiscal year that ends in July and 14 times fiscal 2005 projected earnings. Not bad for a company that Wall Street sees growing earnings by 26% in fiscal 2004 and 19% in fiscal 2005.
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FMC (FMC, news, msgs) is another chemical company that's bucking the trend. Soda ash, used primarily for making glass for cars and buildings, is in tight supply thanks to an industry consolidation. FMC has announced a $15-a-ton price increase. If competitors follow, that could add about 60 cents a share, or a little more than 20%, to projected earnings of $2.80 for 2004. Deutsche Bank expects that at least $7 of the price hike will stick, thanks to the removal of capacity from the market by competitors and FMCs decision to leave some capacity idle until prices firm.
Wall Street projects that earnings per share will grow by 47% in 2004 and 21% in 2005. The shares now trade at 15 times projected 2004 earnings per share.
Monsanto (MON, news, msgs) is in the business of selling crop insurance in the form of chemical pesticides. High global demand and shortfalls in recent harvests have driven crop prices to the top of historic ranges. For example, July corn futures are just 11% below the eight-year high. This makes it worthwhile for farmers to use Monsantos herbicides, insecticides and fungicides to protect their investment in the crops that have started to emerge thanks to earlier than average planting for crops in short supply, such as corn and soybeans.
Wall Street projects that Monsanto's earnings will grow by 17% in the fiscal year that ends in August and by 14% in fiscal 2005. The shares trade at 21 times projected fiscal 2004 earnings.
I wouldnt expect any of these stocks to soar as long as the financial markets remain worried about runaway oil prices. But once it becomes clear that $40-a-barrel oil doesnt mean the global economy's collapse, these stocks should outperform.
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak did not own or control shares in any of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column.
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