How Is Union Pacific’s Industrial Freight Business Faring?

by Trefis Team
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UNP
Union Pacific Corporation
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Union Pacific’s (NYSE: UNP) industrial freight segment includes transportation of industrial products and utilities, such as lumber, steel, and construction products, metals and minerals, paper, furniture and appliances, and waste products by rail.

How Has The Business Been Faring?

  • Segment sales grew at a CAGR of 7% from $5 billion in 2016 to $5.7 billion in 2018, accounting for 25% of the total revenue mix.
  • This compares with a CAGR of 14% for Norfolk Southern’s industrial freight, and a CAGR of 6% for CSX Corporation’s merchandise freight segments during the same period.
  • The growth for Union Pacific in the recent past was led by higher construction related commodities shipments.
  • The segment saw 6% volume growth and 3% ARPU growth in 2018.
  • ARPU growth was also aided by higher fuel surcharge, given the y-o-y uptick in crude oil prices in 2018.

What’s The Outlook For the Industrial Freight Business?

  • We forecast the sales to grow in mid-single-digits in 2019, and beyond.
  • The growth will be led by gains in both volume and ARPU.
  • The near term growth can be attributed to trends in the U.S. industrial production, which was up 4% (y-o-y) in the previous two quarters.
  • Also, the U.S. construction sector is forecast to grow in mid-single-digits over the next three years, according to a research report.
  • This should result in higher shipments of metals, construction products, plastics, and industrial chemicals.

What’s The Outlook For The Company? 

  • The company’s overall revenues will likely grow 3% in 2019.
  • The company also launched Unified Plan 2020 aimed to boost efficiency.
  • This plan should help improve margins and create more reliability for customers, and aid the company’s overall earnings growth in the coming years.
  • As such, we expect the company’s EBITDA margins to improve by 100 basis points in 2019, resulting in mid-single-digit growth in EBITDA to $11.40 billion.
  • We forecast the company’s earnings to be $9.05 per share in 2019, reflecting a low teens growth over the prior year.
  • Our price estimate of $159 for Union Pacific is based off a 18x forward price to earnings multiple.

View our interactive dashboard analysis on How Did Union Pacific Fare In 2018, And What Can We Expect In 2019? You can modify key drivers to arrive at your own estimates for the company’s EPS and valuation. In addition, you can also see more of our data for Industrial Companies here.

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