Union Pacific profit up on record volumes
Thursday April 20, 10:12 am ET
CHICAGO (Reuters) - Union Pacific Corp. (NYSE:UNP - News), the largest U.S. railroad, said on Thursday first-quarter more than doubled, beating market expectations, helped by lower costs, increased velocity of its shipments and better recovery of fuel costs through surcharges.
Analysts said the improvement showed the company's drive to improve velocity and the handling of volumes over its network is beginning to pay off, with the railroad also benefiting from a strong pricing environment.
Like other U.S. railroads, Union Pacific has benefited from rising U.S. imports and a driver shortage that is hurting the trucking industry. As trains are more fuel efficient than trucks, this has pushed more business onto the rails while fuel costs are high.
But tight capacity has led to complaints from customers over network congestion, forcing the railroads to tackle congestion by managing volumes better and laying new track.
The Omaha, Nebraska-based company reported quarterly net profit of $311 million, or $1.16 a share, compared with $128 million, or 49 cents a share, a year earlier.
Wall Street had expected earnings per share of $1.08 a share on average, according to Reuters Estimates.
"Union Pacific has been a bit behind the other railroads in improving efficiency and the fruits of its efforts to catch up are beginning to show," said Don Hodges, chairman of Hodges Capital Management, which manages assets of just under $1 billion.
Hodges said he bought Union Pacific as recently as Wednesday, saying that as the railroad continues to improve he expects its stock to "show continued growth."
The company reported revenue for the quarter of $3.7 billion compared with $3.2 billion a year earlier. Analysts had expected revenue of $3.66 billion, according to Reuters Estimates.
The company posted growth in all its segments, with its automotive, industrial products and intermodal divisions all posting annual growth of 23 percent.
This was accompanied by an improvement in Union Pacific's operating ratio, which fell to 83.7 percent from 90.1 percent a year earlier.
Peter Smith, an analyst at Morningstar, said Union Pacific's results for the first quarter were "surprisingly strong."
"This shows that the company's turnaround plan is taking hold and that Union Pacific is doing well from a strong pricing environment," he added.
Chief Executive Officer Jim Young said in the company's earnings statement that although "we made progress in the quarter with our operating initiatives, we have a long way to go before we are satisfied with our service, velocity and returns."
In a conference call with analysts, Union Pacific Chief Financial Officer Robert Knight said the company has increased the number of customers now paying fuel surcharges, but added that the company is still well short of having 100 percent of customers paying them.
Railroads have been passing on rising fuel costs to customers through surcharges. Knight said Union Pacific is paying $2.10 per gallon for diesel.
He noted fuel costs are the biggest "headwind" for improving the company's operating ratio as there is a two-month lag between a spike in prices and a rise in the surcharge to cover that increase.
In early trade Union Pacific shares were down 28 cents at $94.75.
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