Oil prices on January 5 hit 5½ years low to $50 barrel. This has left the oil production in an unstable mode. The major reason for this was the strengthening of U.S. dollar as it makes the oil imports expensive. Nonetheless, the sluggish growth in China and the prevailing softness in the European economy also played its part.
Delta Airlines
Delta Airlines (DAL, Financial) is the second-largest U.S. airline and provides scheduled air transportation for passengers and cargo throughout the U.S., and around the world. The company's route network is centered on the hub system that it operates at certain important U.S. and international airports. The hub operations include flights, and the network is supported by a fleet of aircraft, which is varied in terms of size and capabilities.
The above chart of the stock depicts its growth. The growth of the company has been evident even in times of crisis. The stock has been up 27.2% since June 2014.
The airline industry has made huge benefits from the fall in crude prices as the lower the price will reduce their operating expenditure. A decline in oil prices is probably even more crucial for airlines. Lower jet fuel prices have been a boon for the airline industry given the inversely proportional relation between crude prices and the value of aviation stocks. This has benefited airline stocks immensely as the cut in oil prices has reduced their operating expenses significantly, thereby aiding the bottom line.
Swift Transportation Co
The transportation industry will drive top-line growth in terms of capacity constraint in the form of driver shortage and new government regulations. Swift (SWFT, Financial) is a transportation services provider across North America. The company has four operating segments, truckload, dedicated, intermodal and central refrigerated. Swift Transportation operates 40 terminals across U.S. and Mexico and is headquartered in Phoenix, Arizona. The company operates more than 16,000 trucks and is the largest full truckload carrier in North America.
The chart shows 200% growth of the company over the years is a clear picture of its success.
A decrease in oil prices would decrease the transportation cost for people as they would be spending less on fuel. This would essentially mean an increase in the purchasing power of their income which translates into an increase in their real income. Therefore, the fall in oil prices benefits the average citizen in terms of higher real income. Again, businesses that use oil as an input would experience a reduction in their cost of production. This would increase their profit margins, some of which they may pass on to the buyers of their goods and services. The buyers will benefit from lower prices of goods and services that will boost their real income. This may motivate them to increase their purchases of goods and services. On the other hand, businesses may also ramp up their production due to higher profits and increased demand. With increased demand for goods and services and higher business activity, the economy may experience a boost leading to higher growth and employment.
Reynolds American Inc
The subsidiaries of Reynolds American Inc. (RAI, Financial) include R. J. Reynolds Tobacco Company (RJR), American Snuff Company, LLC, Santa Fe Natural Tobacco Company, Inc. and Niconovum AB.
RJR Tobacco is a leading cigarette manufacturer while American Snuff is a leading smokeless tobacco product manufacturer in the U.S. Santa Fe manufactures and markets cigarettes as well as other tobacco products under the Natural American Spirit brand.
It will help this sector, which use commodities as raw material, in improving their profit margins, as commodity prices will reduce with the fall in oil prices. The companies may pass on the lower input cost to customers, but still it gives some leeway in managing the efficiency and improving margins
The industry which is benefited is the consumer durables. Reynolds American Inc. being a part of this sector has got the advantage. Although the 2% target of inflation doesn’t seem near yet lower inflation has led to a considerable fall in input costs.
Our take
Strong dollar is also contributing toward making goods more affordable. Despite the occasional decline, the dollar had remained strong through 2014, boosted by hopes of a rise in interest rates.
The decline in oil prices seems set to continue through this year. Though this may lead to losses for energy companies, other sectors may gain from this phenomenon. Given these factors, adding these stocks to your portfolio would be a prudent decision.
