Hurricane Sandy: Sectors to Watch

by Dan Burrows | October 29, 2012 12:05 pm

Hurricane Sandy: Sectors to Watch

Hurricane Sandy, the 100-year storm bearing down on more than 50 million people in the Eastern U.S., promises to wreak havoc on lives and property, as well as sales and profits across a range of industries.

Insurers, retailers, energy companies and airlines are just four sectors directly in the perfect storm’s line of attack — but not all businesses will be hammered in quite the same way.

It’s far too soon to tell, but early projections estimate the storm system could cause $100 billion in damages. And yet, counterintuitively, the insurance industry is probably best prepared[1] to deal with the impact of the hurricane.

For one thing, this is the very business they’re in. Insurance companies are required by regulators to maintain large levels of cash reserves to make good on payouts (and remain solvent) in the event of disasters such as Hurricane Sandy. Furthermore, insurance companies are backstopped by the re-insurance industry — essentially insurance for insurance companies.

More important, years of especially destructive storms, from Hurricanes Katrina to Irene, have taught insurers important lessons — namely, to charge higher homeowner rates and apply stricter underwriting standards.

Insurance companies are therefore better prepared than ever to weather the storm. Consider Allstate (NYSE:ALL[2]), the biggest publicly traded home and auto insurer. The stock fell more than 15% in wake of Hurricane Katrina in 2005, and again after Hurricane Irene in 2011. In the former case, the stock took about a year to regain lost ground. But after Irene, shares rebounded in a couple months.

Airlines, on the other hand, are going to take a hit to their fourth-quarter earnings. There’s simply no way around it, as carriers such as United Continental Holdings (NYSE:UAL[3]), AMR Corp.’s (PINK:AAMRQ[4]) American Airlines, US Airways (NYSE:LCC[5]) and Delta Air Lines (NYSE:DAL[6]) contribute to the cancellation of nearly 11,000 flights and counting.

True, carriers are able to keep most of the sales they’ve already booked (ever try to get a refund from an airline?), but they’ll incur greater costs as they scramble to rebook and accommodate would-be passengers. That will hurt margins and profitability.

If the airlines have caught any kind of break, at least this is a relatively slow period for travel. But that will be small comfort if those same carriers take another hit in the form of higher energy prices.

Most refineries on the East Coast are fed by huge oceangoing tankers, so they are located right on the water — and in harm’s way. That led Phillips 66 (NYSE:PSX[7]), the second-largest refinery on the East Coast, to shut down operations Sunday. Three other major refineries have likewise shuttered production or severely cut back on output.

Yes, refineries are built to withstand hurricane winds, but flooding or a sudden loss of power can cause immense damage, which is why they close shop in such emergencies. And although they can be turned off almost instantly, it typically takes days to get them fired up again, as units need to be slowly reheated and re-pressurized.

Those shutdowns had futures contracts on oil and other energy products trading higher — at least before U.S. markets closed because of the storm[8].

Counterintuitively — and in a break for consumers — gas prices might not rise despite the refinery shutdowns. Why? Because a hurricane bearing down on more than 50 million people greatly reduces driving, and therefore demand for gas.

Lastly, retailers are going to lose traffic in the days ahead, and even emergency shopping for storm supplies at home-improvement stores like Home Depot (NYSE:HD[9]) is unlikely to make up for the shortfall.

True, we always roll our eyes when retailers blame the weather for poor sales — but this time they get a pass. Greater sales of batteries, bottled water and duct tape aren’t going to make up for days of closed stores and the loss of sales of higher-margin products, notes Brian Sozzi, Chief Equities Analyst at NBG Productions & Portfolio Manager for Decoding Wall St. If anything, the end result from such storm shopping tends to be a wash.

“I have never been a fan of investing in ‘storm stocks’ in the lead up to the actual storm, or in the immediate aftermath,” writes Sozzi in a Monday note to clients. “The market feasts on the enthusiasm but then any gains are given back once math is done that the actual impact to sales (less so earnings as storm precaution items are usually low margin commodity type goods) will be muted.”

Interestingly, one possible loser from Hurricane Sandy actually could be Apple (NASDAQ:AAPL[10]). The effect likely would be slight, but as Sozzi notes, the company does have 78 retail stores in the area hit by the storm — good for about 30% of its U.S. store base.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

Endnotes:
  1. the insurance industry is probably best prepared: http://investorplace.com/2012/10/frankenstorm-churns-out-investing-opportunities/
  2. ALL: http://studio-5.financialcontent.com/investplace/quote?Symbol=ALL
  3. UAL: http://studio-5.financialcontent.com/investplace/quote?Symbol=UAL
  4. AAMRQ: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAMRQ
  5. LCC: http://studio-5.financialcontent.com/investplace/quote?Symbol=LCC
  6. DAL: http://studio-5.financialcontent.com/investplace/quote?Symbol=DAL
  7. PSX: http://studio-5.financialcontent.com/investplace/quote?Symbol=PSX
  8. U.S. markets closed because of the storm: http://investorplace.com/2012/10/wall-street-closed-monday-as-sandy-bears-down/
  9. HD: http://studio-5.financialcontent.com/investplace/quote?Symbol=HD
  10. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL

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