Union Pacific: a Turnaround Is Expected

Union Pacific (UNP) announced its fourth quarter and full year 2015 results on 21st January. The company’s operating revenue was to $ 5.2 billion for the fourth quarter 2015, 15 % down from the fourth quarter 2016. The net income for Union Pacific was $ 1.1 billion, or $ 1.31 per diluted share compared to $ 1.4 billion, or $ 1.61 per diluted share, in the fourth quarter 2014.
Union Pacific saw a 9% decline in volumes as measured by total revenue carloads. Volumes declined in each of the company’s business groups with the exception of automotive.

Operating revenue for the full year totaled $ 21.8 billion as compared to $ 24.0 billion in 2014. The company’s net income for the full year was $ 4.8 billion or $ 5.49 per diluted share versus $ 5.2 billion or $ 5.75 per diluted share in 2014, representing 8% and 5% decreases, respectively. Carloadings were down 6 % versus 2014, with declines in each of the Union Pacific business groups with the exception of automotive segment. Operating income totaled $8.1 billion, down 8 % compared to full year 2014. However, operating ratio for the full year was a full year record at 63.1%, better by 0.4 percentage points from the previous record set in 2014.

Segment-wise performance:

The revenue of the Agricultural Products segment was driven down 12 %, 5 % due to a reduction in volumes and 7 % due to a reduction in average revenue per car (ARC). Due to high worldwide production and a strong U.S. dollar, grain exports suffered a decline of 23 %. However, the domestic growth in grain shipments was solid for Union Pacific. Ethanol shipments were down 3 % driven by lower exports for Union Pacific. Grain products decreased 4 % for the quarter driven primarily by softer export of soybean meal and DDG demand. Food and refrigerator product volumes were down 1 % for the quarter as declines in fresh and frozen food shipments were low.

Chemicals revenue was down 7 % for the quarter on a 2 % reduction in volume and a 5 % decrease in average revenue per car for Union Pacific. Due to prices, low demand and a slowdown in China’s production and export sectors, the shipments of crude oil and petroleum products were seriously down. Only LPG demand including Propylene, Propane, and Butane showed some strength.

In the industrial products department, there was a 16 % decline in volume and 8 % decrease in average revenue per car during the quarter resulting into a 23 % decline in revenue. Reduced rig counts and shale drilling resulted in a 42 % decline in minerals volumes. There was also a 27 % reduction in metal shipments due to softening industrial production, reduced drilling activity, and a strong U.S. dollar.

Automotive revenue increased 1 % driven by an 8 % increase in volume was largely offset by a 6 % reduction in average revenue per car. The US is one of the few automotive markets which are thriving at the moment. Its fourth quarter SAAR was 17.8 million taking the 2015 annual sales 17.5 million vehicles, levels last reached 15 years ago.

The intermodal revenue was down 14 % in the fourth quarter owing to a 7 % lower volume and an 8 % decrease in average revenue per unit. The results were down due to the discontinuation of Triple Crown business and sourcing shifts during the fourth quarter. Otherwise domestic intermodal did achieve its seventh consecutive year of record volume last year. But international intermodal disappointed as volume was down 12 % in the quarter primarily due to market volume headwinds for many ocean carrier customers.

In 2016, domestic intermodal volumes are expected to be driven up by highway conversions. However, high retail inventories and sluggish retail demand are expected to hurt international intermodal volumes. Also, the growth in Union Pacific’s intermodal shipments is strongly correlated with the growth in container traffic at west coast ports. Though container traffic is expected to grow on the west coast, the on-going expansion of the Panama Canal could hamper this growth by shifting some traffic to the east coast.

Conclusion:

Railroad investors will have to stop considering coal volume as the sole decider for their investment decision. Coal’s weightage in the portfolio of UNP will continue to shrink. Right now, only automotive segment is showing some promise as all others are strongly correlated with the commodities and energy market which itself is weak. Hence, I won’t advice you to get into UNP before you get a hint of at least 3 of those segments together looking likely to post strong numbers.
Published on Mar 2, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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