Union Pacific Earnings: Volume Grows On Coal, Industrial Carloads

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Union Pacific

Union Pacific (NYSE:UNP) reported its fourth quarter and annual results on January 22. The railroad managed to beat market estimates for revenue and earnings per share for the quarter and year, resulting in its stock rising nearly 5% by the end of the day. The railroad’s fourth quarter revenues grew 9% primarily due to solid growth in its Industrial and Coal volumes. [1] Its operating ratio improved 3.6%, to 61.4%, an all-time quarterly high. Low fuel prices had played a major role in lowering the operating ratio. The quarter’s net profits increased 22%, driving 27% increase in earnings per share.

Strong volume growth in its Industrial, Agriculture and Intermodal segments helped Union Pacific’s annual revenues cross $23.9 billion, an increase of 9% year-on-year. [1] Union Pacific also set a new record for its annual operating ratio at 63.5%, significantly improving upon its previous record of 66.1% in 2013. The railroad has now set a new target of achieving an operating ratio of around 60% by 2019. Strong revenue growth and low operating ratio led to Union Pacific’s annual net income rising 18% and earnings per share by 22%.

See our complete analysis of Union Pacific here

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Coal Volume Grows On Restocking

Union Pacific’s fourth quarter coal revenues grew 9% year-on-year primarily due to strong volume growth as a result of demand from utilities replenishing their coal stockpiles at the onset of the winter season. [1] Easier comparison against the previous year’s weak shipments originating from the Southern Powder River Basin also helped growth. Coal revenues was somewhat unaided by revenue per unit.

Coal revenue per unit was sluggish during the quarter with just 0.6% growth. The railroad continued to suffer from low export coal shipments, which brought down its revenue per unit. Union Pacific’s coal shipments from the Colorado and Utah, which are primarily for export, were down 11% in the fourth quarter. [2]

Union Pacific’s full year coal volumes grew 4% and revenue per unit was stagnant. We believe that coal volumes in the first quarter of 2015 will largely depend on inventory levels at utilities. According to Union Pacific, inventory levels for the month of December were likely low, which should help fuel demand for coal in the first quarter. [3] Thereafter, natural gas prices and weather conditions will drive coal shipments. Natural gas prices at around $2.5 might be a tipping point for coal demand.

Housing Construction And Frac Sand Drive Industrial Volumes

In the fourth quarter, Union Pacific’s Industrials volume grew 10% on continued growth in construction activity and demand for frac sand in the U.S. [1] Housing starts and construction spending were up 6.4% and 8.2% year-on-year for the year to date ending November 2014. [4] [5] Union Pacific’s construction related shipments grew 17% and lumber shipments increased 10%, benefiting from the growth in housing and construction activity. [2]

The demand for frac sand has been on the rise due to the growing use of hydraulic fracturing to extract oil and natural gas from shale deposits in the U.S. This helped Union Pacific’s frac sand shipments grow 35% in the fourth quarter. [3]

For the full year, Union Pacific’s Industrials volumes grew 11% and revenue by 15%. Going forward, frac sand demand and construction activity in the U.S. are likely to continue to grow in 2015 and boost Union Pacific’s Industrials volumes. The National Association of Home Builders forecast a 17.1% increase in housing starts in 2015. [6] The Architecture Billings Index (ABI), a leading indicator for nonresidential construction activity in the U.S., was in positive territory for the eighth consecutive month in November, giving rise to expectations of continued growth in nonresidential construction in 2015. [7] Additionally, natural gas production is forecast to increase in 2015, which indicates that frac sand demand will likely continue to rise. [8]

We will shortly be updating our price estimate of $97 for Union Pacific after incorporating this quarter’s results in our model.

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Notes:
  1. Union Pacific’s 2014 Q4 News Release/Financials, www.up.com [] [] [] []
  2. Union Pacific’s 2014 Q4 Slides, www.up.com [] []
  3. Union Pacific’s (UNP) CEO John Koraleski on Q4 2014 Earnings Results – Earnings Call Transcript, January 22, 2014, www.seekingalpha.com [] []
  4. New Residential Construction, December 16, 2014, www.census.gov []
  5. US Construction Spending Chart, www.ycharts.com []
  6. NAHB Housing and Interest Rate Forecast, January 5, 2015, www.nahb.org []
  7. AIA Architecture Billings Index, www.aia.org []
  8. EIA Short Term Energy Outlook – Natural Gas, January 13, 2015, www.eia.gov []