Union Pacific Plunges Despite Strong Improvement In 4Q’17 Results

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UNP
Union Pacific

As expected, Union Pacific Corporation (NYSE:UNP), the Omaha-based railroad company, posted a strong improvement in its financial performance for the December quarter and full year 2017 on 25th January 2018((Union Pacific Corporation Invites You To Join Its 4rd Quarter 2017 Earnings Release, Union Pacific News Release)). Even though the company’s performance was largely in line with the consensus estimate, it missed the earnings estimate by 1 cent, which caused its stock to drop by more than 5% post the announcement of results. We believe that this is an overreaction by the investors, as the company is well placed to further enhance its performance in the coming quarters.

See Our Complete Analysis For Union Pacific Corporation Here

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Key Highlights of 4Q’17 Earnings Release

  • Union Pacific’s 2017 volumes grew 2% on a year-on-year basis backed by higher industrial and coal shipments. The growth in industrial shipments was driven by increased construction activity, mostly in the non-residential sector, coupled with a rise in farm and primary forest products, and metallic products shipments.
  • The railroad company realized productivity gains of $75 million from its G55 and zero initiatives, taking the full year cost savings to just under $350 million, very close to its target for the year. As a result, the company managed to bring down its operating ratio to 63% in 2017 versus 63.5% in 2016.
  • During the year, Union Pacific booked a tax charge of $3.1 billion, largely due to the implementation of the Tax Cuts And Jobs Act of 2017. Excluding these charges, the company posted an adjusted earnings of $5.79 per share for the year, 14% higher compared to the previous year.

  • Union Pacific generated cash flows of $7.2 billion from its operations during the year, of which nearly $2 billion were paid in dividends and $4 billion was spent in the repurchasing of shares. In addition, the company spent around $3.1 billion in capital expenditure in 2017 to build and maintain its existing infrastructure. Going forward, the company plans to invest $3.3 billion in 2018, of which 70% is expected to be reserved for replacement of its assets and enhancing the safety and resilience of its rail network.

Going forward

  • Starting from 2018, Union Pacific plans to report only four business segments – agricultural products, energy, industrial, and premium, instead of the six reported earlier.
  • For the agricultural segment, the company anticipates continued strength in ethanol exports driven by demand from China, Brazil, and India. Further, the company foresees continued growth in food and refrigerated shipments, which could be offset by the uncertainty in the grain markets.
  • In the energy sector, the railroad company expects strength in frac sand in the first half and uncertainty in the second half due to the viability of local sand. Further, the company expects the coal shipments to grow, albeit at a slower pace than 2017.

  • The premium (intermodal) shipments are likely to grow due to the continued tightness in the trucking capacity, while the industrial markets are estimated to remain stable. The impact of higher shipments in most of the segments is expected to be partially offset by the weakness in the US light vehicle shipments in 2018.
  • On the cost side, Union Pacific aims to achieve productivity gains of $300-$350 million in 2018 as well, as it continues to focus on G55 and zero initiatives. These initiatives will enable the company to reduce its operating ratio to 60% by 2019 and to 55% beyond 2019. Further, the company expects to realize a significant incremental cash benefit from the recent corporate tax reforms, which is likely to boost its bottom-line.

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