UP management decided to inflate the stock price by borrowing heavily to do stock buybacks. That only works when interest rates are low. Their interest expense will be climbing heavily over the next decade as laddered maturies need to be refinanced at higher rates.
Capacity expansion to attract more traffic pretty much stopped when they stopped double tracking the Sunset Route. Blair Cutoff work between Missouri Valley and Fremont stopped dead in its tracks about the same time.
Debt issuances have not been invested in assets that can grow the company. Debt has been used to finance stock buybacks which give the stock a one-time temporary boost that will be paid for into eternity. As interest payments rise and take more cash, capital spending will drop. It will take 10 years to make a significantly noticeable impact because UP is so large, but look how long it took the Pennsy and NYC to get to the point of bankruptcy, for example.
NYC and Pennsy went bankrupt because of a declining traffic base and lack of pricing power to raise rates on remaining rail-captive customers.
UP has pricing power right now to captive customers, but if service levels continue to deteriorate and the common carrier obligation is not being fulfilled in the eyes of Congress, reregulation will result in a loss of pricing power.
For a number of years now UP has said they have returned more than 100% of free cash flow to shareholders. They have done that through a combination of dividends from earnings but the majority of it has been via borrowing for share buy backs. All that is, really, is pulling future profits and free cash flow to the present day, so future levels of both will be lower than they otherwise will be as the interest on the debt will have to be paid into infinity.
In 2010 UP's long term debt was $9.003 billion. Revenue was $16.965 billion and net income was $2.780 billion. The operating ratio was 70.6%.
The whole decade of the 2010s was a decade of Federal-Reserve-Bank-subsidized low interest rates with the Fed Funds Rate at 0% for most of the decade.
In 2021 UP's long term debt was $27.563 billion. Revenue was $21.804 billion and net income was $6.523 billion. The operating ratio was 57.2%. Cash returned to shareholders was $10.1 billion or 46% of revenues.
Like any financial model, it works until it doesn't. It will be interesting to see how UP fares when the paradigm changes.
Meanwhile, BNSF is double and triple tracking all over the place, eliminating bottlenecks for faster transit times, building more logistics parks, investing in BIG, buying back MRL for more Northern Transcon capacity, replacing major bridges, etc.
Warren Buffett told Matt Rose to build the railroad for the next 100 years, and Carl Ice and Katie Farmer have continued to do so as well.
Interesting times in the west are ahead.
The push to the 55% OR precedes the PSR push. G-55+0, IIRC, means the goal of an OR of 55 with no injuries. It started about the time PSR was being extolled by EHH at CN. It was kind of a PSR-lite regimen. That was bad enough, but it wasn't enough for some major interests that started buying into us.
Once PSR came to town, then the big cuts started. Just when it seems that they can't find anything to cut, and say they are going to pivot to growth, they find some way to cut somemore.
They think that they can keep getting away with business (or lack thereof) as usual. I feel they will get a rude awakening when they will discover that their clout with the government doesn't equal the clout that all their major customers have. The problem will be that any reregulations will affect the entire industry.
Jeff
samfp1943 Seems to building up to lots of weeping, and gnashing of teeth; when the STB's hearings take place. The pursuit of a 55% O.R. and P.S.R. will likely get the blame? Should be some interesting comentary?
Seems to building up to lots of weeping, and gnashing of teeth; when the STB's hearings take place. The pursuit of a 55% O.R. and P.S.R. will likely get the blame? Should be some interesting comentary?
It, like the other STB hearings, will be political theater.
An "expensive model collector"
Wait until UP has to roll over its debt issues for stock buybacks at higher interest rates than the original issue. They won't be able to get the OR low enough to offset the increased interest expense hit to the bottom line.
They have laddered maturities of debt - some coming due each year - so it will not happen all at once, but it is coming.
I would opine that Fritz's "running too lean" comment definitely ties back to PSR, etc, although I'd bet the financial folks won't admit it.
The other side of the issue - not finding people who want to work, should indicate to UP (and the other railroads) that they need to rethink how they schedule crews.
Larry Resident Microferroequinologist (at least at my house) Everyone goes home; Safety begins with you My Opinion. Standard Disclaimers Apply. No Expiration Date Come ride the rails with me! There's one thing about humility - the moment you think you've got it, you've lost it...
The TRAINS Newswire of Jan.11th,2023[ by Bill Stephens] has story that seems to indicate that The Surface Transportation Board, is about to take 'Uncle Pete' to its' 'woodshead'. .
Apparently, The Foster Farms (from last month. is again,running out of feed for their chckens). AMTRAK has some large issues with UP's handing of their Sunset Ltd.(late, over 90% of time?),not to mention there are a number of other's, lining up to complain, about their service 'failures'. FTA: "... If Amtrak trains are the canary in the freight railroads’ coal mine, they’re giving plenty of warning about the state of UP’s overall operations and the service it provides.
Yes, like the other three big U.S. railroads, UP has experienced crew shortages, as it’s become harder to hire conductors amid the tightest job market in decades. But CEO Lance Fritz admits UP was already running too lean when crew shortages cropped up. So when harsh winter weather raked the railroad in early 2022, UP coagulated and never fully recovered..."
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