We have all noticed the extreme jump at the pump the past few weeks, but is it really all attributable to Iran and its saber-rattling? Or maybe it is those greedy speculators again? Perhaps the summer driving season is coming early? No, wait, that is only the 60 degree weather we saw in the middle of February. It seems like it is a little bit of everything, but the biggest question on my mind is: When does it begin to tip the scales of economic growth? During 2008, oil peaked at $147 per barrel, with the average cost of a gallon of gasoline topping out at $4.21 in July. According to the AAA's website, the national average for regular gasoline is $3.68, up from $3.529 last night, up from $3.228 last year. Eight states currently have an average fuel price of over $4.31 per gallon.
High fuel prices were part of the reason that the economy faltered the way it did. However, what is the sticking point this time around? Is it $4.00 gasoline, or have we already reached it? The University of Michigan consumer sentiment index rose for the sixth consecutive month, as recent job gains have offset higher prices at the pumps. Then again, this survey was completed over the past month, not the past week, so March could be a completely different story.
There are estimates that fuel prices shaved up to a point of GDP back in 2008 and estimates are now that fuel prices at current levels would shave a few basis points off of economic growth. As fuel continues to rise, my question for you, the reader, is what is the first thing you will change? Will you be cutting something out, maybe a visit to your local PF Chang's? Or will it be a new air filter for your car? For me, it has been looking for ways to improve my car's fuel efficiency. Over the past year, AutoZone (AZO) and O'Reilly's (ORLY) have been two of the best performing stocks in the auto parts retailers sector, gaining 41% and 55%, respectively. Fixing up your old vehicle is one way to go about improving your vehicle's fuel efficiency. Another way is simply by purchasing a more fuel-efficient vehicle.
One direction for investing would be to invest in the automakers themselves for their hybrid and electric lineup. I would recommend investing in companies whose products reach across all the major automakers, and that means auto part manufacturers. Two of my favorites in the space are Johnson Controls (JCI) and BorgWarner (BWA). Johnson Controls is one of the world's largest producers of lithium ion batteries (the batteries that are in hybrids and electric vehicles), while BorgWarner produces powertrain technologies that help improve fuel efficiency for not only the hybrids, but also for those normal internal combustion engines too.
Johnson Controls "missed" the Street's earnings expectations during its most recent quarter by $0.02 per share. However, it was in line with management's expectations. Right now, the stock looks undervalued, trading with a trailing twelve month PE ratio of under 14, compared to the industry average of above 19. On a forward PE basis, the stock is trading at only 9.9 future earnings. For background, Johnson Controls has a PE ratio range over the past five years of between 11.2 and 18.6. Johnson Controls gets a good deal of its revenues from Europe, so that provides a problem for future sustainable growth. However, European auto production and sales are only expected to fall in the small single digits during 2012 (compared to 2011). Despite the weakness in Europe, Johnson Controls still improved its operating margin to near record levels and has a strong balance sheet and good cash flow.
BorgWarner reported a strong bottom line figure during its fourth quarter earnings release. Revenues came in below expectations, but management announced it expects approximately $2.5 billion in new powertrain business over the next three years, and projects about 80% will come from engine-related products, such as turbochargers, ignition systems and emissions products. The remaining 20% should come from drivetrain-related products, including transmission and all-wheel drive technologies.
Revenues missed as a result of weak sales in Europe. However, the company is seeing a shift towards diesel vehicles, and a higher content per vehicle. BorgWarner has beaten the Street's earnings per share estimates in each of the past four quarters, and estimates for the current quarter are on the rise, despite the weakness in Europe.
Both BorgWarner and Johnson Controls are long term plays that will benefit from higher gasoline prices and the push towards more fuel-efficient vehicles. Over the past six months, Johnson Controls is up approximately 10% while BorgWarner is up more than 20%. (For comparison purposes, the Dow is up more than 15% while the S&P 500 is up slightly more than 16%.)
Gasoline prices are going to continue to be on the rise, but will the economic shock be as much as the first time oil hit $147? My guess is probably not. We had the shock the first time oil hit $70, and then $90, and then $100. Now it just seems "normal" for oil to be this high. The economy will begin to slow, but not as much as we saw during 2008. However, the downside to the current market is that most consumers have already cut out all those extraneous trips.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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