Union Pacific Corporation (NYSE:UNP) reported its Q2 earnings on July 19th. The results were solid as core pricing gains and solid growth from automotives, industrial products and intermodal freight drove net income up. Margins improved yet again on decreased fuel expenditure and increased shipping prices across all segments. The only worry for Union Pacific is in its coal freights division, which saw significant volume loses, but that was largely overshadowed by growth in other segments.
We revised up our price estimate for Union Pacific to $128, which now stands at 5% premium to the current market price. Our revision mainly reflects the near-term weakening domestic utility coal demand in the U.S. We moderated our forecasts for intermodal freight due to uncertain economic conditions, and increased out estimates for automotives and industrial products segment as they continue to deliver considerable growth. We also raised our near term forecast for EBITDA margin and company expands its profit through better pricing power.
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- Union Pacific’s Q3 2016 Earnings Review: Lower Shipments And Fuel Surcharge Revenue Weigh On Results
For the second quarter, the company reported a 7% year-over-year increase in revenues, totaling $5.2 billion. Core pricing gains and fuel surcharges were so significant that they magnified the gain in volumes. Revenue ton-miles, a metric for volume measurement, grew nearly 20% and 9% for automotives and industrial products, while their revenues grew by 25% and 14%, respectively. Intermodal revenues increased by 10% as truck conversions continued. Operating income jumped by staggering 24% to $1.7 billion in the first quarter, while net income rose by 28% to just over $1 billion.
Outlook for the year
The U.S. economy has not shown signs of solidarity it used to boast off in the pre-recession era. Purchasing Managers Index (PMI), a meaningful economic indicator, dropped to 49.7% for June after showing 53.5% in May. We believe, for the rest of the year the rail industry will continue to grow along with a gradual recovery in the U.S. economy. We expect automotive, industrials freight and domestic intermodal demand to keep driving volume growth, accompanied by moderate pricing gains.
Coal volumes will continue to drive near-term declines in the energy segment unless natural gas prices rise substantially. Union Pacific’s operations are primarily in the central and western part of the country. In the western coast, the coal export activities have not picked up yet, while other railroad companies serving the east coast and Gulf coast have witnessed increased coal export volumes in the quarter. Let’s look at the emerging trends more in detail. We expect the export activity will rise in the west coast benefiting UNP. Perhaps, domestic coal demand may also revive meanwhile, but that may show a gradual recovery spanning across next couple years.