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What Goes Down Will Come Up

Fossil-fuel betas put energy risk in its place.

In retailing, fossil-fuel exposure at Nordstrom (FFβ −0.4953) appeared to surrender $1.82 of market value, while a neutral profile at Wal-Mart (FFβ 0.0228) appeared to add 11 cents, for a net price difference of $1.93.

Nordstrom, in fact, had posted the most negative FFβ grouping in the retail sector as of December 2007, capping negative results in all rolling three-year periods since 1998. The imputed impact on its EPS: minus 16 cents. Citing favorable recent experience as fuel prices slid (when a high negative FFβ should have furnished a benefit), Nordstrom dismisses its 2008 FFβ as “coincidence,” but the Seattle-based retailer withholds its analysis.

Sundaram’s methodology calculates a neutral beta for Wal-Mart (FFβ 0.0228). Energy consumed by the giant retailer’s North American stores, warehouses, and delivery vehicles should have pushed Wal-Mart toward a negative FFβ along with most of its retailing peers. It is possible that undisclosed financial hedges, in combination with natural hedges, braced the giant retailer’s earnings against oil-price fluctuation in either direction. A fuel-efficient truck fleet, for example, furnishes a natural hedge that saves millions of gallons of gasoline a year, while rising oil prices may actually boost business by herding consumers toward value-oriented retailers. And Wal-Mart and its subsidiary Sam’s Club supply oil at gas stations nationwide. Those factors appear to have combined to create a rare positive FFβ in the retail sector.

Energy costs have long eluded means to manage them. Cost volatility alone warrants a new look at market-based analytical tools. Pressure to go green compounds demand for better data, not least in conjunction with looming cap-and-trade initiatives and related taxes. Besides furnishing a new tool aimed at critical cost control, this first look at a fossil-fuel beta should advance the ongoing energy dialogue. Think of it as just one window on a sustainability landscape still in need of wider exploration.

S.L. Mintz is a deputy editor of CFO. Robert Burnham of the Tuck School provided crucial analytical support for this story.

FFβ Close-Up

$2.8 billion UPS: 2007 operating expenses that went toward fuel

$3.5 billion FedEx: 2007 operating expenses that went toward fuel

0.0576 UPS FFβ

-0.1411 FedEx FFβ

$1.63 Expected difference in share price between the two companies based on a 10% rise in fuel prices given the spread between their respective FFβs.

For a look at how the fossil-fuel beta plays out in 10 sectors, click here.


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