Oil Drop a Mixed Blessing for US Corporate Results

The sharp decline in oil prices has taken a toll on earnings estimates for the U.S. energy sector, but investors expecting a benefit to other sectors of the market may be disappointed, Thomson Reuters research shows.

 

Certain retailers have shown improvement in results as fuel costs have declined, while industrials and materials companies tend to show their results decline even as energy prices fall.

 

Airlines, generally thought of as a possible beneficiary of lower fuel costs, show little correlation between that decline and their results, Thomson found.

 

The oil rout has been responsible for the sharp fall in energy sector estimates. S&P energy earnings are seen shrinking by 19.5 percent, while on Oct. 1, a rise of 6.4 percent was expected.

 

Thomson looked at the relationship between quarterly net income for Russell 3000 companies and the year-over-year change in crude oil and found that the fall in crude translates to a weakening in results for industrials and energy names.

 

The median correlation between net income for industrial companies and crude oil is 0.26 percent - implying a positive relationship between the two, so, when crude falls, industrials' net income falls. A perfect correlation between two instruments is 1; a reading of negative 1 implies an inverse correlation.

 

Thomson Reuters analyst David Aurelio pointed to FedEx earnings for part of the explanation: The company uses fuel surcharges that adjust as gasoline prices change, so they do not benefit from that decline. In addition, as energy prices come down, lower capital spending reduces deliveries handled by the company.

 

Crude is down more than 48 percent from a closing high reached in June. Over that same period, the NYSE Arca Airline index is up 15.4 percent. Southwest Airlines is the year's biggest S&P 500 gainer, having more than doubled in 2014.

 

However, the drop in oil prices may not do much for earnings for the airlines. The median correlation of airline earnings to oil prices is negative 0.06, according to Thomson Reuters data. This essentially means there is no meaningful relationship. Some, including Southwest, are facing potential losses on their hedges, because they hedged against higher jet fuel prices.