The fuel retailing industry has witnessed significant improvement over the past several years, morphing from small stand-alone stations to modernized high-volume fueling units with other provisions like convenience stores. However, customer visits to stations are dependent on a single factor – gasoline prices.
Drop in Gasoline Prices Driving Higher Travels
According to EIA, average gasoline prices per gallon have declined to $3.17 in October from $3.69 in June. A further price drop to around $2.80 per gallon is also anticipated next month. This truly is a happy start to the holiday season with the Thanksgiving weekend coming up and almost everyone making plans to go over the river, through the woods to visit family.
This Thanksgiving treat from gasoline came via a slump in oil prices. The commodity, which is currently trading at the $75 per barrel level compared with $100 per barrel around July due to oversupply, pushed the gasoline prices down.
AAA, a federation of motor clubs throughout North America, expects 46.3 million travelers this Thanksgiving holiday period from Nov 26 to Nov 30. Automobile travels will likely lead the way with over 89% of the total, marking year-over-year growth of 4.3%. The airline industry is also hopeful of about 3.55 million passengers flying for Thanksgiving. Economic betterment and higher disposable income are backing these optimistic forecasts. Higher travels should give a boost to sales of retail fueling operators.
Understanding Refining & Retail Profitability
Gasoline prices are dependent on four factors – crude oil price, taxes, refining costs and marketing and distribution expenses. According to The Association for Convenience & Fuel Retailing or NACS, crude oil costs account for about two-third of the gasoline price. So the commodity plays an important role in driving profitability.
Also, customers tend to opt for a different fueling station even for a few pennies less on a gallon – a psychological move that retailers tend to exploit by keeping minimum difference between their selling price and fuel cost.
The fueling station owners and operators tread on a narrow line in terms of margins. However, with input costs remaining low and end product demand on the rise, refiners and retailers are set to benefit this traveling season.
Our Choices
While the price trend will favor many stocks, we present three with a good Zacks Rank that are likely to make the most of this Thanksgiving holiday period.
Murphy USA Inc. (NYSE:MUSA) sells motor fuel products and convenience merchandise through its chain of fueling stations in the U.S. The El Dorado, AR based company reported third-quarter 2014 earnings of $1.36 per share, beating the Zacks Consensus Estimate of $1.17.
Murphy USA holds a Zacks Rank #1 (Strong Buy) and has expected earnings growth of 9.63%. Current year and current quarter estimates moving higher suggest more good news.
Alon USA Partners, LP (NYSE:ALDW) refines and markets petroleum products. The Dallas, TX based company also has a wholesale distribution network through which it sells its products.
The partnership reported third-quarter 2014 earnings of $1.23 per unit, beating the Zacks Consensus Estimate of $1.12. Alon USA Partners holds a Zacks Rank #1 and has expected earnings growth of 37.61%.
Global Partners LP (NYSE:GLP) is a distributor of gasoline, distillates, residual oil, renewable fuels, crude oil, natural gas and propane and operates through three segments, namely, wholesale, gasoline distribution and station operations and commercial.
The partnership reported third-quarter 2014 earnings of $1.50 per unit, beating the Zacks Consensus Estimate of 17 cents. Global Partners holds a Zacks Rank #2 (Buy) and has a massive expected earnings growth of 145.95%.
Bottom Line
Of the many blessings this Thanksgiving, make sure to count the drop in gasoline price. The investment world too should reap abundant profits from the abovementioned downstream stocks.