One of the stronger commodities over the past couple of months has been oil. Oil prices have moved from $85.00 a barrel for West Texas Intermediate (WTI) in November to just under $100.00 per barrel currently.
There are many variables that go into oil prices. Naturally, the initial reaction is to blame geopolitical risks; however, we have not seen any real increase in hostilities, such as an attack on Iran by Israel, that would explain such a strong move in oil prices lately.
Two recent reports might shed some light on the strength in oil prices. The Chicago Institute for Supply Management recently released its Chicago Business Barometer data for January, which showed a sharp 5.6-point increase to 55.6 compared to the previous month. Its data are based on a three-month average, indicating an increase in business activity. (Source: “Chicago Business Barometer,” Institute for Supply Management Chicago web site, January 31, 2013, last accessed February 4, 2013.)
Following that release, the national report on manufacturing by the Institute of Supply Management, as opposed to the regional Chicago report, showed that the Purchasing Managers’ Index rose to 53.1%, a 2.9% jump from December. Thirteen of the 18 manufacturing industries surveyed showed growth in January, with four contracting and one remaining neutral. What’s also of interest is that the petrochemical and coal sector reported a high level of capital expenditure and investment that’s expected to continue in the first two quarters of 2013. (Source: “January 2013 Manufacturing ISM Report On Business,” Institute for Supply Management Chicago web site, February 1, 2013.)
Oil prices look set to continue at current levels, with the possibility of increasing further throughout the year. The growth of America’s energy industry has been a substantial benefit for corporate earnings in this country.
The problem in America is not generating supply, but transporting the supply. One company that can take advantage of strong oil prices and a lack of pipeline infrastructure to help generate corporate earnings is American Railcar Industries, Inc. (NASDAQ/ARII).
American Railcar builds a variety of railcars, including hoppers used to transport grains, in addition to tank railcars, which are used for various petroleum products, including oil.
Because of the lack of infrastructure to move oil around the country, there is a big spread between oil prices in certain parts of the country. Oil prices that have a wide spread open the door to additional profits and corporate earnings for firms that can help alleviate this discrepancy.
During the third quarter of 2012, American Railcar reported revenues of $168 million, up a massive 34% from the previous year’s quarter. During this time period, the company shipped 1,460 railcars, yet it had an enormous backlog of over 7,630 railcars. Corporate earnings for the third quarter were $30.0 million, up a staggering 152% from the same quarter in 2011. (Source: “American Railcar Industries, Inc. Reports Record Quarterly Earnings From Operations and Earnings Per Share,” American Railcar Industries, Inc. web site, October 24, 2012, last accessed February 4, 2013.)
Chart courtesy of www.StockChart.com
This is a five-year chart for American Railcar. Clearly, investors in this company are benefiting from the spread in oil prices through higher corporate earnings from shipping tank cars to help fill the logistical void left by a lack of pipeline infrastructure.
With over 7,600 railcars in its backlog, corporate earnings should continue to rise over the next few years. Building a new pipeline does not occur overnight. Oil prices will continue to have a spread, based on the lack of infrastructure.
Even after the big run in the stock, it only trades at a forward price-to-earnings ratio of just over 12 and has a forward dividend yield of 2.6%. With the recent pickup in manufacturing, this could add additional support for not only oil prices but also coal demand.
American Railcar can also build railcars that are used for coal transportation. If coal demand increases even marginally, this could substantially drive demand and corporate earnings for the company. In either case, with the substantial backlog that they currently have, there is plenty of room for corporate earnings to grow, with oil prices set to continue exhibiting a wide spread.
It’s unfortunate that politics are preventing the building of additional infrastructure so that the spread in oil prices could narrow, which would benefit the entire U.S. However, it is providing an opportunity for strong corporate earnings for companies such as American Railcar.
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By: Sasha Cekerevac
Posted: February 5, 2013, 7:49 am
We believe the stock market and the economy have been propped up since 2009 by artificially low interest rates, never-ending government borrowing and an unprecedented expansion of our money supply....