Union Pacific Corporation (NYSE:UNP), one of the leading railroad companies in the United States, posted net income of $957 million in Q1 2013, which represented 11% increase from the prior year. Its operating revenue grew by 3% y-o-y to $5.3 billion in the quarter even as the overall volume declined by 2%, owing to challenges in the coal and agricultural markets. Pricing gains contributed to the increase in revenue as the average revenue per car rose by 6% annually during Q1 2013. Its operating ratio came in at 69.1% during Q1 2013, which was 140 basis points lower than the prior year.
We are encouraged by these results as Union Pacific has once again showed strength in its franchise by offsetting volume declines with inflation-plus pricing gains. We think the improvement in operating ratio puts the company on track to achieve its target of sub-65% operating ratio by 2017. Union Pacific expects the full year volumes to show positive growth in 2013 (assuming normal growth of the economy) and the coal market to recover in Q2 2013.
Performance Of Union Pacific’s Different Product Groups During Q1 2013
Revenue Increase (Annual Growth)
|Volume Increase (Annual Growth)||
Average Revenue Per Car Increase (Annual Growth)
Union Pacific expects coal market to recover in the second quarter
While Union Pacific saw a massive decline in its coal volumes during the quarter, it was partially offset by strong pricing gains within the segment. The domestic demand for coal remained week due to high coal inventory levels at utilities. Moreover, the loss of a contract at the beginning of the year contributed to the drop in volumes.
Union Pacific expects coal volumes to show a slight increase in the second quarter driven by easier y-o-y comparisons, higher natural gas prices and lower inventory at utilities.  This is in line with our previous expectation that the coal market outlook could brighten in the future with higher natural gas prices as they reached around $4 (per million BTU) at the end of March 2013. We think normal weather conditions and higher demand for electricity generation would be necessary for this outlook to come true.
Agricultural market is expected to stay weak in the second quarter
Union Pacific’s agricultural volumes saw a decline in Q1 2013 as a result of the carryover from last year’s drought which continued to impact grain carloadings. Both domestic and export feed grain shipments suffered a decline on account of tight corn supply and improved global production. Union Pacific expects agricultural volumes to decrease by the low double digits in the second quarter.  We think that a normal crop output in 2013 could improve agricultural shipments during the second half of 2013.
Chemicals shipments are expected to stay strong throughout 2013
Union Pacific’s chemicals shipments posted a solid increase during the quarter on account of higher shipments of crude oil, LP gas and plastics. Crude oil shipments increased by 107% annually and 11% sequentially in Q1 2013. We expect this segment to keep growing in 2013 on account of higher crude oil shipments and growth in the U.S. chemicals sector; however, the pace of growth could start to decelerate later in 2013 on account of difficult y-o-y comparisons.
Intermodal business also carries a positive outlook during 2013
Higher volumes in the intermodal business were underscored by growth in the international intermodal business due to strengthening of the economy. We expect a positive outlook for this segment during 2013 on account of continued truck-to-rail conversions, and a recovery in the housing market.
Automotive revenues showed high growth mainly due pricing gains
Union Pacific’s automotive revenues increased in Q1 2013 mainly on account of pricing gains as the average revenue per car rose by 11% within this segment. While we expect the automotive market to stay strong during 2013, the volume growth could continue to be impacted by difficult y-o-y comparisons.
Mixed performance in industrial products
Union Pacific’s industrial products volumes showed flat growth in Q1 2013 on account of mixed performance of different product groups within the segment. While shipments of non-metallic minerals and lumber increased, the shipments of hazardous waste materials and metallic minerals suffered a drop. Increased drilling activity, new pipeline projects and a housing recovery are expected to support future demand within this segment; however, iron ore shipments could remain weak on account of lower export demand.
We are in the process of estimating the price for UNP’s stock.Notes:
- Union Pacific Management Discusses Q1 2013 Results – Earnings Call Transcript, Seeking Alpha, April 18, 2013 [↩] [↩]