A Quick Snapshot of Union Pacific Corp’s Industrial Freight Segment

by Trefis Team
Union Pacific Corporation
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Union Pacific Corporation (NYSE: UNP) generates its revenues primarily from various commodities freight, including agriculture, coal, and industrial, among others. The Industrial Freight segment accounts for 20% of the company’s value, according to our estimates. This can be attributed to the expected steady growth in volume and pricing, led by higher demand for commodities. We have created an interactive dashboard highlighting the company’s Industrial Freight segment. You can adjust revenue drivers and margins for 2018 to see how it impacts the company’s overall revenues and income. Below we discuss our expectations and forecasts for the company.

Expect Industrial Freight Segment To Drive Growth

The Industrial Freight segment accounts for roughly 20% of the company’s overall revenues and EBITDA. The average price realization for industrial freight is 137% of the average price realization across the company. Even in terms of carloads, it accounts for around 48% of the company’s overall carloads, and is thus an important segment for Union Pacific’s operations. We expect UNP’s Industrial Freight revenues to grow 7% to $4.37 billion in 2018. Industrial freight revenues are dependent on two factors – Number of Carloads, and Revenue Per Carload. We expect steady growth for both of the factors in the near term. We expect this growth to be driven by a growth in the commodities market, primarily oil and steel, which will result in more shipments for railroad companies.

The U.S. oil production is expected to be the highest ever in 2018. So far, WTI crude has rallied to $71, marking the highest levels since late 2014, and there is no sign of weakening demand. In fact, the company saw a 22% growth in Petroleum, LPG, and renewables carloads in Q1, primarily due to crude oil shipments. The trend in oil prices will likely boost drilling activity and increase the demand for crude oil related shipments in the near term. Looking at other commodities, steel shipments are expected to increase, as many players in the U.S. are adding capacity. Favorable demand-supply dynamics with respect to these commodities will boost segment revenue growth. Accordingly, we forecast a low to mid single digit growth, both on volume and pricing for UNP’s Industrial Freight segment. Also, fuel surcharges are a component of Revenue Per Carload, and are linked to prices of WTI or U.S. On Highway Diesel. With oil prices expected to trend higher in 2018, higher fuel surcharge revenues will boost Revenue Per Carload. In addition, the company has considerably improved its value proposition to customers with improvements in certain performance metrics such as network velocity, and transit times, over the last few years. Improved service levels give the company leeway to charge higher freight rates.


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