What did the different sensitivity mean for shareholders of UPS (FFβ 0.0576) and FedEx (FFβ -0.1411)? Enough to nudge earnings in opposite directions by several cents a share. A 10 percent increase in the cost of fuel, Sundaram estimates, would strip the equivalent of 10 cents a share from FedEx. That, in combination with a P/E ratio of 12.2, relinquished an imputed $1.22 in share price, a penalty that a different energy policy might have offset. Conversely, a 10 percent drop in fuel prices should boost earnings in equal measure.
By maintaining a neutral FFβ, closer to zero, UPS delivers 3 cents of implied excess earnings, or 41 cents in share price (applying a P/E of 15.9). This net difference of $1.63 in the stock prices of two rivals resulting from a 10 percent change in fossil-fuel prices highlights why a fossil-fuel beta might help managers frame savvy questions around energy consumption. One explanation might lie in UPS's aggressive pursuit of conservation initiatives, such as more fuel-efficient facilities, minimizing miles flown or driven, and converting 25 percent of its truck fleet to lower-emission vehicles.
Even steeper differences separated rivals in other industries. The imputed market impact of a 10-cent rise on petroleum producer Apache Inc. (FFβ 0.0657) was 71 cents a share; on Valero Energy Corp. (FFβ 0.5351), $3.75 a share. All 13 oil producers in the roster have neutral-to-positive FFβs, an outcome consistent with classical economics, says economist Robert Hansen, director of Tuck School's Allwin Initiative. "This is the likely result of an increase in the demand for energy over this period, combined with rising asset values associated with the energy firms' fossil-fuel reserves."
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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