Of the railroads in our coverage universe, Union Pacific Corporation (NYSE:UNP) posted the strongest results again with growing revenues by 3% during Q4 (7% for the full year) while CSX Corporation (NYSE:CSX) and Norfolk Southern (NYSE:NSC) reported revenue declines. As in the previous quarter, the company improved its operating ratio to 67%, which led to a 7% increase in operating income. 
We think that all of these metrics are impressive in the context of the uncertain macroeconomic backdrop that has plagued the other railroads. Overall they show that Union Pacific’s management has done a good job in controlling costs and improving freight pricing.
Core Pricing Gains Drive Growth
As expected, UNP’s freight volumes were slightly down (2%) during the quarter. The decline was driven by a 17% year-over-year decrease in coal volumes and a 9% decline in agricultural products. The declines in these segments were offset by a 14% increase in chemical volumes and a 9% increase in automotive volumes.
As was the case in the previous quarter, Union Pacific’s volume declines were offset by an increase in average revenue per carload, which increased 5%. Union Pacific was successful in growing the average revenue per car for each of its segments, the largest of which was an increase of 12% in coal freight prices. Due to these pricing gains, overall freight revenues increased 2%. In our opinion, these core pricing gains put the company in a great position to weather the potential slowdown in freight volumes going forward. We think that the weak global economy will continue to impact freight volumes, and if volumes decline, Union Pacific seems to have the pricing power to maintain revenues.
Improving Operating Ratio
Union Pacific posted another year over improvement in its operating ratio, which declined 1.2 percentage points year-over-year. Overall, the company improved some of its efficiency metrics such as increasing the average speed of its trains by 4% and decreasing its rail-car inventory by 4%. This should help the firm the operating ratio in check. We place a lot of value on this metric because if UNP can’t increase pricing as it sees a slowdown in volumes, it can still maintain profitability by decreasing its operating ratio.
Management Needs to Stay Proactive
As we’ve repeatedly stated, the Euro crisis, US fiscal cliff, and the possibility of a Chinese slowdown are causing a lot of uncertainty in the global economy. Most economists do not expect growth to be robust in the coming quarters because of the risks plaguing the global outlook. 
We think that Union Pacific’s management has done a good job in the uncertain macroeconomic backdrop of 2012, and will need to continue to do so in 2013. Management will need to take quick actions to adapt to constantly changing market conditions to ensure growth.
Q4 Guidance From Management
During its earnings call, Union Pacific’s management reiterated that the uncertain macroeconomic backdrop will continue to have an impact on its business. Management expects that coal volumes will be down again in 2013, primarily due to low coal demand domestically. Additionally, the company expects that agricultural freight will remain weak in the first half of the year, but hopes that agricultural production will return to the mean and lead to a recoverty in H2 2013. Due to these factors, the company will again look to increase pricing to drive revenue growth and cut costs to improve bottom-line growth in 2013. Notes: