A combination of an annual inflation gain at a 41-year high, an aggressively hawkish Fed and surging energy prices have roiled the stock markets. Gasoline prices are already hovering near $5 levels, and in the last five days, the S&P 500 index (SPX) is down 9.5% while the tech-heavy NASDAQ Composite index (NDX)is down 11.2%. This means, finally, broader indices are in bear territory and panic is more than evident in plummeting stock prices.
Rising gasoline prices impact a broader set of industries, with oil stocks benefitting from higher revenues, expanded margins, and, in the current scenario, robust cash flow generation. Names such as Occidental Petroleum (OXY), Pioneer Natural (PXD), and Range Resources (RRC) have been clear winners of this trend, with increased value creation for their shareholders in the form of buybacks and higher dividends.
All these names have delivered nearly 100% returns over the past year, and the TipRanks stock comparison tool indicates analysts continue to see further double-digit gains in them.
At the other end of the spectrum are industries such as transportation, consumer goods, and food that are at the receiving end of rising oil prices (Brent crude and Texas Intermediate crude have been hovering at their highest levels since the last recession) and labor prices. This possible adverse impact is more pronounced for Uber (UBER) and Delta Airlines (DAL).
Uber
In the case of Uber, the impact of gasoline will be felt both in ride-hailing and food deliveries. The company has introduced a surcharge on fares and deliveries in markets including the U.S., Canada, and India to lower the impact of rising fuel prices. In India, the company is facing trip cancellations and, in some instances, a refusal to turn on air conditioning by drivers.
Furthermore, the company’s Head of Rides Unit, Dennis Cinelli, stepped down this month. Last month, Raj Beri, the Head of Uber’s grocery unit, stepped down.
Shares of the company are down nearly 51% so far in 2022. Goldman Sachs analyst Eric Sheridan has reiterated a Buy rating on the stock but decreased the price target to $45 from $55 due to a weak macro climate.
Nonetheless, the stock remains attractive after losing half its value in 2022, and the Street has a Strong Buy consensus rating alongside a $48.85 price target, which implies a 126.47% potential upside.
Delta Airlines
Airline stocks are simultaneously seeing rising travel demand, easing pandemic restrictions, increased airfares, higher fuel costs, and a shortage of labor. The shares of Delta Airlines have declined 18% in the last five days alone.
At the recent Bernstein 38th Annual Strategic Decisions Conference, Delta noted it expects 20% to 25% higher non-fuel unit costs versus 2019 levels due to lower capacity and higher selling expenses. Further, the expected operating margin of 13% to 14% is 3 to 4 points lower than 2019 levels due to 70% higher fuel costs.
Additionally, major stock selling by Delta Airlines’ top insiders may not exactly be the positive cue investors would expect.
Argus Research analyst John Staszak has reiterated a Buy rating on the stock but decreased the price target to $46 from $47. Overall, the Street has a Strong Buy Consensus rating on Delta alongside a $53.27 price target, implying a 65.38% potential upside for the stock.
Closing Note
The surge in fuel prices has come at an already challenging time for the economy as well as investors. While the winners of this trend are clearly visible, the possible losers will become more and more pronounced as the full impact of labor shortages, inflation, and rising rates comes into the picture.
Read full Disclosure
