A Snapshot of Union Pacific’s Business And Outlook

Union Pacific Corporation (NYSE: UNP) generates its revenues primarily from various commodities freight, including coal, industrial, and agriculture, among others. The Intermodal and Industrial Products Freight segments combined accounts for roughly 40% of the company’s overall revenues. We believe that the Intermodal segment will grow at a faster pace in the near term, primarily due to capacity constraints in the trucking industry. We have created an interactive dashboard ~ What Are Union Pacific’s Key Sources of Revenue.  You can adjust the revenue drivers to see the impact on the company’s overall revenues, earnings, and price estimate.

Intermodal Segment Will Likely Continue To See Strong Growth In The Near Term

Union Pacific’s Intermodal segment accounts for roughly 20% of the company’s total revenues. Intermodal freight refers to the shipment of containers that can be moved from one form of transport to another. The segment revenues have grown in the recent quarters, amid volume gains. We expect this trend to continue in the near term. The ELD (electronic logging device) mandate being fully implemented, has put a constraint on the capacity of the trucking industry. This increases the competitive advantage of railroads over trucks. As shippers move to railroads to ship freight, railroad companies, such as Union Pacific’s Intermodal shipments will likely increase. We forecast the segment revenues to grow in low double digits in 2018, led by gains in both pricing and volume. Pricing growth will partly be led by higher fuel surcharges. Looking at H1 2018, the Premium segment volume grew 4% and average revenue per unit grew 6%. Note that Intermodal is reported under the Premium segment by Union Pacific under its new segment reporting structure.

Expect Industrial Freight To Grow In High Single Digits

Industrial Products freight also accounts for roughly 20% of the company’s total revenues. The segment revenues have increased in the recent past, due to growth in construction, which led to higher shipments of lumber, and metals. Note that the private construction activity has seen modest growth in the recent past. Looking at metals, steel production is expected to grow in low single digits, amid price increases due to tariffs being imposed by the U.S.  These factors will likely aid the near term growth. We currently forecast a high single digit growth in segment revenues in 2018, led by both volume and pricing gains. Note that average revenue per carload for most of the segments will likely trend higher in the near term, given the uptick in oil prices. Oil has been trending higher in 2018, due to several geo-political concerns, among other factors. This will likely translate into higher surcharge revenue for railroad companies.

Expect Mid-High Single Digit Growth In Chemicals Freight

Looking at the Chemical freight segment, it accounts for more than 15% of the company’s revenues. The segment revenues grew in low single digits in 2017, and we expect the growth to be higher in 2018, led by both pricing and volume gains. The overall chemicals shipments should see an uptick, as the U.S. chemicals production is expected to grow by over 3% in 2018 and 2019. Also, the U.S. oil production is expected to be 10.7 million b/d in 2018, the highest annual average U.S. crude oil production level ever. Despite higher production, prices are much higher than the 2017 average. Higher oil prices will likely boost drilling activity and increase the demand for crude oil related shipments and its by products, as well. This will also aid the average revenue per carload, thereby driving the overall segment revenue growth.

The company’s other segments include Agricultural, Automotive, Coal, and Commuter Rail & Other Services, which combined accounts for around 40% of the company’s overall revenues.

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