Want a peek at this summer's headlines? Then just watch the
action in the oil market. The price of oil has been rising steadily
for nearly two years, and it's coming close to the point of
inflicting real pain on many businesses. If current trends
continue, we may be talking about $4 for a gallon of gasoline by
spring, and surging home heating oil costs later in the year.
In many respects, the United States can tolerate $70 oil, or even
$90 oil. But at $100 or even $110, so many companies will start
speaking of profit-margin pressures. Andprofit margins are the key
factor behind many strategists' forecasts for continued stock
market gains in 2011. This is why you should be worried, even if
you don't own oil stocks in your portfolio.
Up until now, stocks have been rallying in tandem with oil prices.
That's quite unusual. We've been in a rare period where rising
economic activity has been good for both assets.
Yet if history is any guide, further oil price spikes will tend
to deflate stock prices. Here are three stocks in particular that
simply cannot withstand oil prices above the $100 mark.
All of the major airlines are in far better shape than a few years
ago. Surging oil prices really hammered them in 2007, and a sharp
drop in air travel keptshares down in 2008. Yet during the past two
years, lower oil costs and rising demand have helped the
Amex AirlineIndex (AMEX:
to triple in value. Further gains will be hard to come by as the
cost of jet fuel will likely be well higher in 2011, and no carrier
is more vulnerable than AMR, the parent of American Airlines.
While other carriers have slowly migrated to more fuel-efficient
fleets of planes, AMR's cash crisis forced it to stick with older
inefficient planes. The typical plane is 15 years old, nearly twice
the average age of planes being flown by carriers such as
. Just how bad would it get for AMR if oil prices surged? Analysts
currently think the carrier will lose a modest amount of money in
2011 if oil prices stay at $90. But at $100 oil, AMR might lose
upwards of $1.50 a share. And $110 oil would translate into
anearnings per share (
) loss of around $3. Make no mistake, any further spikes on oil
prices will start to push AMR's
down below the 52-week low of $5.86.
Darden Restaurants (NYSE:
This operator of restaurant franchises such as Red Lobster, Olive
Garden and Longhorn Steakhouse has staged an impressive rebound,
with shares doubling in less than two years. But rising energy
costs would inflict pain in several ways.
For starters, its client base would be paying a lot more to fill up
gas tanks. The difference between filling a tank at $2.50 a gallon
versus $4 a gallon is about $30. That's money that has otherwise
been spent dining out. In addition, Darden incurs energy costs
throughout its supply chain, from the fuel used by agricultural
suppliers, to the diesel burned by delivery trucks that may look to
once again look to add fuel surcharges as they had done the last
time oil spiked in price.
Right now, analysts think Darden will boost sales around 6% in
fiscal (May) 2012, with profits growing at twice that clip. But
downward revisions to those forecasts appear inevitable. Right now,
it's the surging cost of food -- most notably beef and seafood --
that will pressure margins in coming quarters. At a recent analyst
day, Darden expressed plans to trim costs to offset some of the
cost pressures and expressed plans to raise menu costs. Passing on
those cost increases to customers at a time when gasoline prices
are rising will be difficult to master.
Shares may start to feel the heat before those trends play out. A
very difficult winter, highlighted by above-average snow and
below-average temperatures in the eastern half of the United States
(a trend which is expected to continue through February), looks
increasingly set to crimp reported sales for Darden and its peers
Brinker International (NYSE:
. Rising energy costs, rising food costs and traffic-sapping
weather make you wonder why shares are within a point of their
I'm very curious to hear what GM has to say about its 2010
fourth-quarter results (the date for the announcement has not yet
been released). As I noted a few weeks ago, analysts at Morgan
Stanley are predicting a very strong quarter. [They think it can
And they stand by that view, even after Ford's disappointing
But regardless of how recent results are trending, rising oil
prices would be a real disaster for both of these companies. Even
as investors focus on all of the new fuel-efficient cars coming out
of Detroit, industry profits are still rising on the backs of
high-margin pick-up trucks. Sales have rebounded nicely for these
trucks, and 6% sales growth in 2011 for each firm is predicated on
truck sales rising even higher. In GM's case, it's a big factor
behind forecasts forEPS to surge more than 40% this year.
In December, GM noted that truck sales rose 28% from a year
earlier. That surely helps thebottom line , as trucks can deliver
$4,000 to $8,000 in profits, depending on how they are configured.
On the plus side, if home construction ever gets going, demand for
trucks by contractors could really pump up GM's numbers. But a
spike in oil prices would work against that factor as well as put a
brake on broader economic growth.
Action to Take -->
On a purely fundamental basis, oil prices need not rise any higher.
Supplies are ample and demand remains below levels seen a few years
ago. But the International Energy Agency (IEA) recently noted that
it expects global oil demand to expand by 1.4 million barrels a day
or 1.6% year-over-year in 2011. The projected increase will be
driven entirely byemerging markets , which underscores the greatest
risk to the U.S. economy: that oil prices could rise even before
the U.S.economy builds a true head of steam if emerging economies
Now is an important time to assess the potential impact of rising
oil prices on your portfolio. The stocks mentioned above would
likely feel the heat of rising oil prices even more deeply than
most other companies, but it's important to keep this in mind for
all the stocks you own.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.