How $5 Gasoline Will Change Every Aspect Of The American Economy

gas prices

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At five dollars a gallon, gasoline could lower U.S. GDP growth from a projected 2.5 per cent in 2012-2013, to 1.5 per cent. Given that Americans consume 130 billion gallons of gasoline a year this could have a significant impact on the economy.A new report from BMO Capital Markets looks at how $5 gasoline could impact different industries of the American economy.

Nearly as many names and sectors benefit from higher gas prices as those that are hit by $5 gas.

Note: All data pertains to companies in BMO’s coverage universe.

$5 gas prices would be positive for railroads

  • If gas reaches $5 per gallon it would be favourable for railroads b/c it would see more truck-to-rail conversions and make trucking less competitive.
  • Railroads are 3.6 times more fuel efficient compared with trucks.
  • In the scenario where gas reaches $5 per gallon, we estimate line-haul costs/container mile for trucks is about 5.4 times higher than that for rail- roads.
  • Norfolk Southern Corp, CSX Corp, Kansas City Southern positioned to benefit from truck-to-tail conversions.

Source: BMO Capital Markets

$5 gas prices would be a near-term headwind for trucking and logistics

  • 'A rapid rise in fuel prices would be a near-term headwind for earnings because fuel surcharges in the trucking sector generally lag the change in the price of fuel by one week to one month. However, once the fuel prices settle at a higher level, the pressure eases as the fuel surcharges catch up.'
  • Rising fuel prices have more of an impact in the truckload sector than the less-than-truckload (transportation of relatively small freight) space.
  • Business failures because of rise in gas prices would not be as bad as they were in 2008. In this scenario fuel costs will increase about 20 per cent, compared with the 60 per cent surge in 2008.
  • Higher fuel costs will impact demand for trucking but shippers can turn to rail or water that are less sensitive to the price of fuel.
  • Intermodal businesses i.e. those that carry freight that can easily be swapped between a few transport modes like rail, road, inland waterways, air etc. will benefit from higher fuel costs.

Source: BMO Capital Markets

$5 gas prices indicate increasing sales at retailers like Macy's but lower sales for Wal-Mart

  • Sales at Dollar General and Wal-Mart are inversely proportional to gas prices, while those of Macy's and Nordstrom move in the same direction.
  • Wal-Mart has a strong rural presence. It's rural consumers drive more miles and form the lower income demographic, which explains the inverse co-relation between sales and gas prices.
  • Since Macy's is patronized by a middle-class customer and Nordstrom is patronized by a higher-income group, these stores benefit from the underlying economic strength which offsets the impact of higher gas prices.

Note: This data is restricted to broadlines (retailers that deal in high volume and cheaper end of the product line) and hardlines (retailers that have goods like electronics, furniture, sporting goods etc).

Source: BMO Capital Markets

$5 gas prices are not expected to have a major impact on specialty apparel

  • Most retailers consider $4 gas prices to be the point when consumers start holding back on their discretionary spending. But higher prices at the pump don't really change spending habits of higher income households.
  • Barring an unexpected economic shock, higher gas prices alone have little negative effect on companies because specialty apparel is skewed to an upper-middle income consumer.

Source: BMO Capital Markets

$5 gas prices would hurt boating in the leisure sector

  • Higher gas prices most obviously impact powersports sector in the leisure industry. Brunswick the world's largest boat manufacturer is likely to be hit the hardest since boats have poor gas mileage.
  • Less obvious, it also raises costs because of the expense of getting a boat to the water. 'According to the NMMA, boat owners spent more on gas in 2010 to get to their boat or get their boat to water ($3.7 billion) than they actually did in the operation of their boat ($2.4 billion).'
  • The impact will also be felt on off-road vehicles like ATVs with companies like Polaris taking a hit but much less so than boats.
  • Companies like Harley Davidson which have superior gas mileage will benefit from higher gas prices.
  • Toy makers like Mattel, Hasbro, Mega Brands could be impacted by rising fuel prices as households are put on a tighter budget.

Source: BMO Capital Markets

There is no statistical relationship between changing gas prices and restaurant comparable sales

  • Gas prices have no correlation with restaurant sales or restaurant stock performance. But, if $5 gas prices accompany a strong economy with job and income growth, this benefits the restaurant industry. If $5 gas prices however accompany weaker economic growth then it would amplify the negative economic impact to restaurants.
  • Changes in employment explained 65 per cent of the changes in comp sales across the restaurant stocks that BMO covers.

Source: BMO Capital Markets

For the most part $5 gas will have little impact on the movie and gambling industry

  • Exhibition industry has been mostly immune to economic swings in the past two decades including a spike in gas prices. While some consumer discretionary / leisure spending categories slowed down a little, major exhibitors like AMC, Cinemark, Regal etc have not really seen the impact.
  • Carmike Cinemas has however has sees weak attendance because of higher gas prices because it is centered in the Southeast portion of the U.S. and operates in more rural settings.
  • The gambling industry is not likely to see a major impact from gas price hikes because individuals whose gambling behaviour is impacted by higher gas prices usually represents a negligible amount of revenue for casinos anyway.
  • 'Disney parks and resorts tend to be destination resorts or high priority excursions that certainly transcend gas prices for most park and resort visitors.'

Source: BMO Capital Markets

Since gas prices follow oil prices, $5 gas could impact personal care and household stocks with exposure to oil

  • Gasoline prices have had a slight impact on total sales volumes mostly because consumers in developed markets tend not to cut back on necessities. Some categories of personal care and household products could be impacted as consumers may switch to value brands.
  • Companies like Avon may be impacted because its representatives have less incentive to drive long-distances to make their sales.
  • Personal care and househould products (PCHP) stocks with significant exposure to oil and its derivatives are impacted by higher gas prices, since high gas prices typically follow high oil prices. Companies like Procter & Gamble and Kimberly Clark Corp (which owns brands like brand names include Kleenex, Scott and Huggies) are impacted by high gas prices because of their exposure to oil.

Source: BMO Capital Markets

$5 gas could create a favourable operating environment for consumer packaged goods companies

  • 'Higher gas prices would create a favourable operating environment for private label consumer packaged goods (CPG) companies, particularly private label food manufacturers.'
  • Households in the lower income cohort that have to spend more on gas are likely to cut down expenses on food. Private-label food manufacturers find appeal with value-conscious consumers.
  • Hain Celestial, Mead Johnson, and Smart Balance are well positioned to offset an impact from higher gas prices because they are patronized by higher income consumers who are less likely to change their spending patterns in response to higher gas prices.

Source: BMO Capital Markets

For the most part $5 gas would hurt food retailers though some companies will fare better than others

  • Food retailers will be impacted by higher gas prices because of the general negative impact they have on consumers but some companies fare better than others.
  • Supervalu and The Pantry Inc stand would be most negatively impacted by $5 gas because of consumers don't trust its pricing and the companies might not be able to be flexible on pricing.
  • Casey's General Stores Inc and Susser Holdings Corporation stand to gain from gas prices because counter-intuitively while customers place a cap on the amount spent on gas per trip, traffic to the stores increase because they are likely to have to fill up gas more frequently.

Source: BMO Capital Markets

A sudden jump to $5 gas would be a mild negative for auto parts but have little impact on vehicle sales

  • Car sales are impacted by a number of things including employment, consumer confidence etc. There however hasn't been a significant consistent relationship between U.S. light vehicle sales and gas prices. The impact would depend on the pace at which prices increase.
  • Sudden spikes in gas prices could however hurt new vehicle sales. Moreover fuel prices have however had a significant impact on vehicle segment market share with fewer purchases of light trucks during periods of rapid gas price increases. SUVs have also been sensitive to high gas prices.
  • CNW Marketing Research found that among consumers that currently have no intention of buying a new vehicle 58 per cent would postpone new vehicle purchases if gas rose to $4 a gallon and 81 per cent would postpone it if prices rose to $4.50 per gallon. Among consumers who wanted to buy a vehicle in the next six months, 73 per cent would buy a fuel efficient vehicle at $4.00 per gallon and 87 per cent at $4.50.
  • Auto parts suppliers have massive exposure to Ford, General Motors and Chrysler which have in the past been hurt by rising gas prices. But the three have modified their portfolio of small and more fuel efficient vehicles.

Source: BMO Capital Markets

Food and Ag products

  • Agribusiness is expected to outperform the S&P500 by a huge margin if rising oil and gas prices reflect in the price of higher end-products, and increased demand for alternative fuels.
  • Archer Daniels Midland Company (ADM), Darling International (DAR) and Bunge Limited are the best investment avenues in the event of rising oil and gas prices. The first two would gain from rising demand for alternative fuels, with ADMs ethanol business getting a huge boost. Darling would benefit from higher commodity prices.
  • U.S. packaged foods should outperform because of increased number of people eating at home. But those stocks would not outperform agribusiness stocks.

Source: BMO Capital Markets

Now here's a quick guide to America's energy outlook in the coming years...

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