Pricing Gains And Growing Industrial And Automotive Shipments Will Help Union Pacific’s Earnings

Union Pacific Corporation (NYSE:UNP), one of the leading railroad networks in the U.S., will report its fourth quarter 2013 results on January 23, 2014. We believe that pricing gains will be a major factor driving revenues in the fourth quarter since volume growth seems very modest. In the previous quarter, the company reported a 5% gain in revenue on pricing gains. ^[1] The volume growth was stagnant.

As seen throughout the railroad industry, declining coal shipments will continue to impact overall volumes for Union Pacific in the fourth quarter of 2013. However, the positive performance in automotive, chemicals and industrial shipments segments will offset the decline in coal volumes. Positive growth in the agricultural market will also have a favorable impact on overall volumes.

Another key metric is operating ratio (operating expenses expressed as a percentage of revenues) which is an indicator of the railroad’s efficiency. We believe that for Union Pacific, pricing gains combined with operating efficiency will drive growth in its fourth quarter and full year 2013 results.

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Revisiting Q3 2013 Results

Union Pacific’s operating revenue in the third quarter of 2013 grew 4% to reach $5.57 billion. ^[1] The growth was primarily driven by pricing gains since volumes were stagnant compared to the same quarter last year. Growth in automotive, chemicals and industrial shipments offset declines in coal, agriculture and intermodal shipments.

Union Pacific’s operating ratio saw a marked improvement in the third quarter. It stood at 64.8%, an improvement of 1.8% over the third quarter 2012. The company is on track to achieve sub-65% operating ratio by 2017.

Automotive Shipments Will Continue To Grow

The growing U.S. auto industry had a positive impact on Union Pacific’s automotive shipments in the third quarter. Automotive shipments grew 8% driven by increasing finished car and spare parts sales.  Growing automotive sales will bolster growth in automotive shipments in the fourth quarter as well.

Housing and Shale Related Volumes Will Help Growth In Industrials Shipments

The shale gas boom in North America continues to drive demand for frac sand, finished pipes and other drilling commodities. Shale related volumes along with crude oil accounted for 4.5% of Union Pacific’s overall volumes in 2012, and we expect the number to increase in 2013. ^[2]

Housing starts are at an all-time high and continue to grow. This drives growth in shipments of construction material such as lumber, aggregates, steel, cement and bricks.  In the third quarter 2013, Union Pacific’s industrials shipments grew 9% on increased shale related volumes and housing construction material and lumber shipments.

Agricultural Shipments Will Post Positive Results In The Fourth Quarter

In the previous quarter, agricultural shipments declined by 4% resulting in a 2% decline in revenue. We believe that because of a strong harvest this season and easier year on year comparison, agricultural shipments should see double digit growth in the fourth quarter.

Intermodal Shipments To Post Modest Growth

Union pacific’s intermodal shipments saw a 1% decline in volume in the previous quarter, which offset pricing gains of 2%. ^[1] However, the demand for intermodal shipments in the fourth quarter has been slightly positive.  Coupled with pricing gains, we believe that the segment may post a modest growth in revenues.

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1. Union Pacific Management Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, October 17, 2013 [↩] [↩] [↩]
2. Credit Suisse Global Industrials Conference, December 4 2013, www.up.com [↩]