Union Pacific Earnings Preview: Revenues Could Decline On Coal, Intermodal Shipments

Union Pacific (NYSE:UNP) will be reporting its first quarter earnings results on April 23. We expect to see a decline in its revenues driven by weakness across its coal and intermodal segments. The railroad is likely to see an improvement in operating ratio (operating expenses expressed as a percentage of revenues) driven by low crude oil prices. However, this will also have a negative impact on Union Pacific’s fuel surcharge revenues.

In the fourth quarter, Union Pacific’s revenues grew 9% primarily on solid growth in industrial and coal volumes. ^[1] The operating ratio improved 3.6% to 61.4%, an all-time quarterly high, supported by low fuel prices. The railroad has now set a new target of achieving an operating ratio of around 60% by 2019. The quarter’s net profits increased 22%, driving a 27% increase in earnings per share.

See our complete analysis of Union Pacific here

Weak Coal Carloads

U.S. railroads have been suffering from weak metallurgical and thermal coal prices in the global market. Coal prices have slumped due to high exports from Australian coal suppliers and low demand from China. Additionally, the strong U.S. dollar has also presented headwinds. U.S. coal suppliers have either had to lower their prices in order to remain competitive or have stopped exporting. This has led to steep declines in railroads’ export coal carloads.

On the domestic front, demand for coal at electric utilities has been declining. For the month of January, coal consumption at electric utilities declined 15% year-on-year, leading to a 16% rise in coal stock piles. ^{[2] [3]} The spot price for natural gas at Henry Hub has remained close to $3 per million btu in the past few months, a level at which utilities start to shift from coal to natural gas. This is also evident from the rise in natural gas consumption at electric utilities, which grew 6% year-on-year in January. ^[4]

Union Pacific’s coal carloads, which accounted for 17% of its revenues in 2014, have also been suffering due to these trends. Its coal carloads have declined 7% in the quarter to date ending March 28 and the weakness is likely to persist in the short term. ^[5]

Intermodal Headwinds

Union Pacific’s intermodal volumes have suffered due to labor disputes at west coast ports, which caused shutdowns and backlogs and also led to many shippers moving their merchandise to the east coast. According to Union Pacific’s carload report, its intermodal carloads are down 3% year-on-year in the quarter to date March 28. ^[5] However, now that the labor contract negotiations between the International Longshore and Warehouse Union (ILWU) and the Pacific Maritime Association (PMA) have ended, Union Pacific’s intermodal carloads have begun to recover. But the recovery will take some time, as operations at the west coast will take more than three months to return to normal. ^[6] This should temper revenue growth of one of the most important segments for Union Pacific. Intermodal accounts for 19% of Union Pacific’s revenue, the highest of all other reported segments.

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1. Union Pacific’s 2014 Q4 News Release/Financials, www.up.com [↩]
2. Table 2.1.A. Coal: Consumption for Electricity Generation, March 27, 2015, www.eia.gov [↩]
3. Electric Power Sector Coal Stocks: January 2015, March 27, 2015, www.eia.gov [↩]
4. Table 2.4.A. Natural Gas: Consumption for Electricity Generation, March 27, 2015, www.eia.gov [↩]
5. Union Pacific’s 2015 Week 12 Carloading Report, www.up.com [↩] [↩]
6. US west coast battles cargo backlog, March 9, 2015, www.portstrategy.com [↩]