Energy investors were excited as crude prices rose steadily throughout the summer. But by early September, global demand was sputtering, and Saudi Arabia cut prices to some key customers, causing benchmark Brent and WTI Crude to tumble below $40/barrel.
With that in mind, we asked three Motley Fool contributors what stocks they'd recommend to investors looking for a safe haven from the volatility of the oil industry. They came back with Axalta Coating Systems (AXTA 0.09%), American Tower (AMT -0.59%), and Waste Connections (WCN -0.19%). Here's why.
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Profit from a lower price of oil
Lee Samaha (Axalta Coating Systems): Coatings company Axalta isn't in the oil industry, but it has an opportunity to benefit from falling oil prices in two main ways.
First, lower oil prices imply lower gasoline prices, and that's likely to induce an increase in miles driven. As cars are driven more, they are more likely to have accidents, and that means an increase in demand for coatings in the auto-refinish market. For reference, Axalta has heavy exposure to the vehicle refinish market -- around 39% of its total sales.
Second, around 50% of Axalta's costs come from raw materials, and around 65% of its purchased raw materials are derived from crude oil and natural gas. As such, lower oil prices can lead to higher gross margins for the company.
It's not a perfect inverse relationship, because customers ask for discounts when energy prices fall, and Axalta tries to pass on increased energy prices when oil prices rise. Nevertheless, a look at gross margins versus the price of oil for two of Axalta's major competitors (with longer trading histories) shows how that lower price of oil does indeed tend to lead to higher gross margins -- good news for painting and coatings companies.
Data by YCharts
Outside of the vehicle refinish market (39% of sales), Axalta has significant exposure to light vehicle and commercial vehicle original equipment coatings (27% and 8%, respectively) and demand should improve in 2021 as vehicle production recovers from the factory shutdowns in 2020. Meanwhile, Axalta's industrial coatings sales should also improve with better economic growth.
Everything points to a stronger 2021 for Axalta, and analysts have sales growing 15% and earnings per share recovering to $1.52 from $0.81 in 2020. Ultimately, it means Axalta would trade on 16.2 times 2021 earnings. Throw in the company's excellent history of converting income into free cash flow, and some upside potential from a lower price of oil, and Axalta looks a good value.
A sky-high stock
John Bromels (American Tower): Not only do many oil companies drill deep into the earth, but many of their stocks are also heading down, down, down. So it's refreshing to consider a stock that's instead sky-high, both in terms of its operations and its share price.
American Tower is a real estate investment trust (REIT) that owns and operates cellular towers and the land on which they stand. Wireless providers and other telecoms rent space on American Tower's towers to mount equipment like antennas.
American Tower's share price has -- with few exceptions -- been steadily increasing over the last 10 years. That's in large part because American Tower's customers sign long-term inflation-adjusted contracts to mount their equipment on its towers, ensuring a steady stream of revenue regardless of economic conditions. And because those customers tend to be deep-pocketed telecommunications providers, the risk of default is very low. Indeed, you'd never know there was a recession this year to look at American Tower's 20% dividend hike and 10% revenue growth in the first half of 2020.
With the ongoing 5G rollout increasing demand for tower space, American Tower -- even at its current high share price -- seems like a better bet than oil to outperform over the long term.
Take out the trash -- and add it to your portfolio
Scott Levine (Waste Connections): While some intrepid investors remain fixed on exposure to Texas tea, plenty of other investors have decided to forego investments in oil-related stocks due to the historic volatility. And for those who find themselves in the latter category, Waste Connections is a worthwhile consideration. Serving more than 7 million customers, Waste Connections dubs itself the "premier provider of solid waste collection, transfer, recycling and disposal services in mostly exclusive and secondary markets across the U.S. and Canada."
Over the past 10 years, the price of oil has vacillated wildly; however, Waste Connections has risen steadily.
WTI Crude Oil Spot Price data by YCharts.
What has delighted investors over the past decade and led them to pick up shares of Waste Connections? For one, the company has demonstrated proficiency at growing both the top and bottom lines. While Waste Connections reported revenue of $1.3 billion and net income of $135 million in 2010, the company has consistently grown both metrics, resulting in it reporting sales and net income of $5.4 billion and $567 million, respectively, in 2019. The cash flow statement also demonstrates the company's adeptness at finding the treasure in others' trash. Over the past 10 years, Waste Connections has increased its operating cash flow from $328 million to $1.54 billion, representing an impressive compound annual growth rate (CAGR) of 18.8%. Similarly, the company has also excelled at generating free cash flow, increasing it from $194 million to $874 million -- a CAGR of 18.2%.
It's not only the company's past performance that is encouraging; management's guidance for 2020 -- though slightly lower than 2019 -- demonstrates the company's resilience to the headwinds that the global pandemic presented. Waste Connections forecasts 2020 revenue of $5.3 billion, flat compared to 2019, and operational cash flow of about $1.36 billion -- approximately 1.2% below the $1.5 billion it reported last year.
Volatility in the oil market will likely remain in the near term, especially considering OPEC's recent downward revision of its 2020 and 2021 forecasts. Unlike the ups and downs that commodity-related businesses exhibit, waste collection is steady and not subject to the whims of the market and oil stocks, making Waste Connections a compelling choice for investors looking to avoid market turbulence.
