Union Pacific’s Q1 2017 Earnings Review: Top Line Growth, Productivity Gains Drove Earnings Improvement

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Union Pacific

Union Pacific released its Q1 2017 earnings result and conducted a conference call with analysts on April 27. [1] The company reported a considerable increase in its earnings as a result of higher revenue and productivity gains.

UNP Q1 2017 Earnings Review

Union Pacific’s shipments rose largely due to a 16% increase in coal shipments. [2] An increase in natural gas prices has resulted in a resurgence in the demand for coal from utilities. Natural gas prices are expected to average $3.10 per MMBTU in 2017, around 25% higher than in 2016, making the fuel less attractive vis-a-vis coal for utilities. [3] Besides volume growth, improving demand conditions led to a 1% increase in core pricing for Union Pacific. Moreover, higher fuel prices boosted Union Pacific’s fuel surcharge revenue, translating into a 4% year-over-year increase in revenue per carload. [2]

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In addition to higher revenue, Union Pacific’s ongoing productivity improvement initiatives supported earnings growth in Q1. Lowering locomotive servicing and repair costs, improving resource utilization and other operational improvements drove $90 million worth of productivity savings in the quarter. [1] From a strategic perspective, Union Pacific is committed to improving the efficiency of its operations to boost profitability. The company is targeting an operating ratio (operating expenses as a % of revenue) of 60% by 2019, which is a considerable improvement from the figure of 63.5% registered in 2016. [4] Thus, the company is likely to continue to work on streamlining its operations in the coming quarters.

Looking ahead, Union Pacific’s shipment volumes should continue to grow on an year-over-year basis. Besides higher coal shipments, strengthening economic growth in the U.S. should translate into a growth in shipments across categories. Given the company’s ongoing strategic focus on boosting productivity, rising shipments should translate into earnings growth for Union Pacific for the rest of year.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Union Pacific

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Notes:

  1. Union Pacific’s Q1 2017 Earnings Call Transcript, Seeking Alpha [] []
  2. Union Pacific’s Q1 2017 Earnings Release, SEC [] []
  3. Short Term Energy Outlook, EIA []
  4. Union Pacific’s 2016 10-K, SEC []