Lower Oil Prices Will Drive Casinos, Cruises Higher: But Which Ones?
Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Overwhelming shifts in supply and demand will drive fuel prices lower over the next few years. Since fuel prices are at 2012 highs based on refinery shutdowns, this trend will be particularly strong. Sustained low crude oil prices will, over time, translate into lower gasoline prices, lower jet fuel prices, and lower diesel prices. These price movements will make cruises and Las Vegas vacations more affordable. Investors seeking to play lower oil prices should consider attractively-priced stocks from these industries.
Record Gasoline Prices at the Pump
Gas prices might be up at their 2012 peak in the U.S., but according to analyst estimates they could drop to their yearly lows by the end of 2012. The onset of winter will decrease demand while the revival of dormant oil refineries will increase supply.
Prices at oil service stations could fall by as much as 6.3% per gallon, which translates to a final average price of about $3.54 at the pump. This is a trend observed by Bloomberg in its report, which compiles seasonal data from the last eight years. At this time, Europe will be delivering more gasoline to the US, with volume going by as much as 35% higher.
The third quarter should have shown a drop in gasoline prices at the pump, but instead Virgin Islands and U.S. East Coast refineries getting shut down, which also lowered the supply. This led to an increase in oil prices at the pump, with gas going nearly $4 to the gallon.
The Case for Cheaper Crude Oil
The refinery bottleneck is a short-term problem which will soon be resolved. There is a bigger long-term trend of declining fuel prices. The price of crude oil recently dropped to below $90 per barrel. The decrease is part of an ongoing, multi-month downward trend in oil prices. The steady descent in oil prices may simply be a part of crude oil’s ultimate demand destruction, a consumer response to the persistent high price of gasoline.
This price weakness is the natural result of a free market increasing long-term supply in response to higher market prices. Remember the cries of “peak oil” from energy bulls? Speculation in the 2008 commodity bubble provided substantial funding for new drilling projects and investment in new energy technologies. This funding catalyzed the rise of natural gas fracturing, the long-term of threat of renewables as unexpected new energy challengers.
Unfathomable energy sources are coming by land and by sea. In addition to hydraulic fracturing, other technologies will further substantiate natural gas as a cheap substitute for petroleum oil on a global scale.
Most of the world's largest natural-gas deposits have been found in the ocean over the last 10 years. Seaborne liquefied natural gas plants are being built to harvest these resources. The largest LNG producers in the world, led by Royal Dutch Shell (RDS.A), have figured out how to mobilize their processing plants as floating barges that can tap into remote underwater fields. Shell has plans to build a floating LNG plant in South Korea within a year at an expected cost of $13 billion. These plants may offer a cost savings in addition to geographical flexibility since a land-based facility costs about $20 billion to build. This technology could unlock a virtually untapped resource.
Lower Fuel Prices are a Casino Jackpot
Lower future fuel price trends create a great environment casinos and cruise ships. People will take more vacations and attend more remote conferences. However, not all stocks in this industry are attractive investments.
Wynn Resorts (NASDAQ: WYNN) stock is too expensive at a price of roughly $111.80, a price level which seems impossible to justify. Wynn Resorts shares currently trade at a high 21.79 price-to-earnings ratio, a higher value than the 14.1 average of the S&P 500 index. This stock also trades at a huge 32.97 price-to-book multiple. Analysts expect that the firm's earnings growth will accelerate with five-year estimates at 16.9% per year, even though the stock suffered a 4.8% annualized earnings decline over the past five years.
Wynn Resort’s 1.79% dividend yield of the stock is likely unsustainable since this payout represents 132% of earnings.
Similarly, Las Vegas Sands (NYSE: LVS) stock is too expensive at a price of roughly $44. Investors can buy more revenues per dollar from the S&P 500 since this stock has a much higher 3.49 ratio. Las Vegas Sands shares are trading at a pricey 25.27 price-to-earnings ratio and a high 4.07 price-to-book multiple.
On the other hand, MGM Resorts International (NYSE: MGM) could be a value trap. This stock currently trades around $10.50 per share. Its 0.56 price-to-sales ratio and 0.89 price-to-book multiple are very attractive. However, the firm ran a net loss for the last twelve month and is highly leveraged. Ultimately, debt issues could continue to plague this stock.
By comparison, cruise stocks are a day at the beach. Consider Carnival (NYSE: CCL). It traded near $37 per share recently. At this price the firm's 1.85 price-to-sales ratio is in line with today's prevailing market multiples. Carnival shares currently trade at a high 20.26 price-to-earnings ratio, a higher value than the 14.1 average of the S&P 500 index. The price-to-book multiple of this stock is 1.18, cheaper than the 2.05 S&P 500 average. Analysts expect that the firm's earnings growth will accelerate with five-year estimates at 11.9% per year, instead of the 2.6% annualized earning decline experienced over the past five years. The firm's reasonable 0.37 debt-to-equity ratio demonstrates that the firm is not overleveraged.
Royal Caribbean Cruises (NYSE: RCL) presents an even better investment opportunity at $31 per share. At a value of 0.87, this stock trades at a fraction of the S&P price-to-sales average multiple. Royal Caribbean Cruises shares are trading at a fair 14.16 price-to-earnings ratio, in line with the S&P 500 average. The 0.82 price-to-book multiple of this stock is very attractive, much cheaper than the 2.05 S&P 500 average. Analysts expect that the firm's earnings growth will accelerate with five-year estimates at 9.9% per year, considerably faster than 1.2% annualized earnings decline experienced over the past five years.
Today, investors should consider buying shares of Royal Caribbean. Investors should also consider Carnival stock if its price-to-earnings ratio converges with the broader stock market. The land-locked casinos considered here are either too pricey or have weak balance sheets, and should be ignored at present.
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