Union Pacific Shines On Industrial And Agricultural Shipments

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Union Pacific (NYSE:UNP) reported its third quarter 2014 results, posting strong growth in revenues and volumes. Its revenue grew 11% year-on-year, to reach $5.8 billion, driven by double digit volume growth at its Industrial and Agricultural segments. [1] Union Pacific’s Coal shipments were flat and Chemicals were sluggish during the quarter.

One of the highlights of this quarter’s results was Union Pacific’s operating ratio (operating expenses expressed as a percentage of revenue). Despite the 7% increase in operating expenses, its operating ratio improved 2.5%, to reach 62.3%. This brings Union Pacific well in-line to achieve its target of a sub-65 operating ratio for the year. A decline in operating ratio bodes well for Union Pacific’s shareholders since it translates to higher net profits and cash flows. In the third quarter, Union Pacific’s net profits increased 19%.

In the coming quarter, Union Pacific’s cash flows may be impacted by the planned capital spending, which includes the purchasing of 32 new locomotives. The total capital expenditure planned for the year was $4.1 billion, of which approximately $800 million remains. Union Pacific will continue its locomotive purchase in 2015 as well, adding another 200 new locomotives. [2] We believe this bodes well for Union Pacific since it will help cater to the growing volumes and also bolster performance metrics.

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See our complete analysis of Union Pacific here

Housing and construction activity drives Union Pacific Industrial shipments revenue

Union Pacific’s Industrial shipments revenue increased 19% driven by continued growth in the U.S. housing and construction market. Though housing starts have been volatile in the first nine months of 2014, they have been higher than the respective levels in 2013. After a strong 1.117 million figure in July 2014, housing starts declined to 957,000 in August 2014. [3] However, these numbers were up 24% and 8% year-on year in July and August respectively, indicating a continued upward trend. Housing starts increased 18% year-on-year in September. Additionally, construction spending in the U.S was also up 6% year-on-year over the two months, July and August 2014. [4]

The housing market is optimistic about continued growth driven by the increase in building permits, which have also been up year-on-year. These trends are driving the forecast for a 7.7% increase in housing starts in 2014. [5] Construction spending in the U.S is also expected to grow along with the U.S. economy, which is forecast to expand 2.2% in 2014, 0.5% higher than earlier forecasts, and 3.1% in 2015. [6] Union Pacific’s Industrial shipments, which includes shipments of housing and construction related material such as lumber and gravel, should continue to benefit from the growth in housing and construction activity.

Last year’s strong corn production helps drive Agricultural shipments

In 2013, corn production grew 30% leading to a decline in its price. [7] The increase in corn production and corresponding decline in price benefited Union Pacific. Higher corn production, along with high soybean production, led to a 14% increase in Union Pacific’s grain carloads in the second quarter. The low corn prices encouraged an increase in ethanol production which helped drive Union Pacific’s grain mill products.

We believe that this year’s strong harvest will continue to have a positive impact on Union Pacific’s Agricultural shipments. Corn production is expected to increase 4% year-on-year in 2014, to 14.5 billion bushels and soybean production is expected to increase 17% year-on-year, to 3.93 billion bushels. [8] This should help continue to drive growth in Union Pacific’s agricultural volumes through 2014. Additionally, ethanol production is expected to increase from 13.3 billion gallons in 2013 to 14.2 billion gallon in 2014 driven by the low corn prices. [9] [10] This should also have a favorable impact on Union Pacific’s Agricultural carloads in the coming quarters.

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Notes:
  1. Union Pacific 2014 Third Quarter News Release Financials, October 23 2014, www.up.com []
  2. Union Pacific’s (UNP) CEO John Koraleski on Q3 2014 Results – Earnings Call Transcript, October 23 2014, www.seekingalpha.com []
  3. US Housing Starts Historical Data, www.ycharts.com []
  4. US Construction Spending Chart, www.ycharts.com []
  5. NAHB Housing and Interest Rate Forecast, September 16, 2014, www.nahb.org []
  6. IMF World Economic Outlook, October 14, 2014, www.imf.org []
  7. Crop Production 2013, www.usda.gov []
  8. Crop Production,October 10, 2014, www.usda.gov []
  9. U.S. Fuel Ethanol Data Summary, www.eia.gov []
  10. Ethanol Outlook Brightens, July 23 2014, www.agweb.com []