Union Pacific operating income jumps 47 percent in a year

Posted by Roy Blanchard

Union Pacific stepped up to the quarterly earnings plate Thursday and, like CSX, knocked the first pitch out of the park. It’s a case of doing many things right. Operating income was up 47 percent to $988 million on a 16 percent revenue increase to $4 billion. Operating expense was held to a 9 percent gain, just 1.5 percent if you exclude fuel. The operating ratio dropped five points to a first-quarter record of 75.1.
 
Average revenue per unit was up 3 percent with no commodity posting a decline. Year-over-year revenue deltas were positive in every group; ditto revenue units in all but coal. During the call Dennis Duffy, vice chairman for operations, said that they were able to take road and yard train starts down even with volumes up 13 percent by shifting work among yards, increasing train lengths, and keeping furloughed train and engine employees’ skills up for a moment’s recall. In short, taking variability out of the network increases efficiencies for the railroad and yields greater satisfaction for customers.
 
Merchandise carload (all but coal and intermodal) revenue increased 18 percent on 16 percent more revenue units; coal revenue was up 5 percent on a 1-point decline in carloads, with intermodal gaining 25 percent in revenues on 21 percent more units. Executive Vice President of Marketing and Sales Jack Koraleski said this quarter was the first since the 2008 first quarter to show year-over-year volume growth. Sequentially, it’s the best revenue-unit count since fourth quarter 2008.  
 
Koraleski cited particular revenue strength in chemicals, agricultural products, and industrial. With respect to this last group, he said it’s a good sign when the comps are positive in aggregates, cement, and lumber, and right now he’s got two out of three, waiting for cement to catch up. It’s also important to note UP auto parts business is up 42 percent year-over-year. In my capacity as a short line analyst, I’m expecting some of that ought to rub off on the little guys.
 
The agricultural products revenue drivers were export wheat, soybeans, and soy meal; ethanol was up 28 percent partly on the increased California blend needs, and dried distillers grains, an ethanol byproduct, went up proportionately. Chemical revenue growth came chiefly on double-digit gains in soda ash, industrial chemicals, and fertilizer. On the call, Morgan Stanley analyst Bill Greene asked about inventory management on the part of UP customers. Koraleski said it’s mostly just-in-time replenishment stocks with few manufacturers willing to bet on inventory builds.
 
Below the line, earnings-per share-came in at $1.01, up 41 percent over last year’s 70 cents, and against a 95-cent consensus estimate. However, some analysts see earnings in the $1.09-$1.11 range as “clean” numbers that strip out some one-time items. The consensus estimate for the second quarter is $1.04, a similar beat and taking out one-time stuff could be in the cards, implying a strong second quarter where once again the carload network (56 percent of first-quarter sales) takes a leading role.