Union Pacific Corporation (NYSE:UNP), the largest class-1 railroad in the United States, recently reported a huge 14% and 33% jump in its first quarter revenue and operating income, respective.  A modest recovery in the U.S. economy led to volumes growth mainly in automotive, industrial and intermodal, while strong industry pricing power helped the company sustain a double-digit growth rate. Much like competitor CSX Corporation (NYSE:CSX) and in line with our expectations, the company’s coal volumes declined in the period. Union Pacific has the largest railroad network in the United States in terms of route miles owned, with nearly 32,000 miles of track, of which it owns about 26,000 miles outright.
Our price estimate for Union Pacific is $114, which is slightly ahead of the current market price. Our revision mainly reflects the near-term weakening domestic utility coal demand in the U.S and other items.
For the first quarter, the company reported a 14% year-over-year increase in revenues, totaling $5.1 billion. Volumes grew in most business segments except for energy and agriculture. The company’s revenue growth was largely driven by core pricing gains and improved fuel surcharge recovery. Automotive and industrials revenue grew the most, by about 26% and 25%, respectively, while energy revenue declined due to a slump in coal demand. Intermodal revenues increased by 15% as truck conversions continued, but a decline in international intermodal volume offset some of those gains.
Operating income jumped by 33% to $1.5 billion in the first quarter, while net income rose by 35% to $863 million.
Strong Pricing and Improved Traffic to Support Higher Earnings
We think that the rail industry will continue to grow along with a gradual recovery in the U.S. economy. We expect automotive, shale gas and domestic intermodal demand to keep driving volume growth, accompanied by moderate pricing gains. Coal volumes will continue to drive near-term declines in the energy segment unless natural gas prices rise substantially. We expect that continued conversion of truck traffic in the U.S. will drive domestic intermodal growth, but international intermodal traffic could lag as imports may remain weak.
The company is rightly investing in strengthening its infrastructure. President Obama’s refusal of the Keystone XL pipeline proposal might actually benefit the rail carrier, providing it with an opportunity to transport Canadian oil to various American refineries through its rail network.Notes: