What To Expect From Union Pacific’s Q1

Union Pacific Corporation (NYSE: UNP) is set to release its Q1 financial performance on April 18. This note details Trefis’ forecasts for Union Pacific, as well as some of the key trends we will be watching when the company reports earnings. You can view our interactive dashboard analysis ~ How Is Union Pacific Likely To Have Fared In Q1?  ~ for more details on the expected performance of the company. In addition, you can see more of our data for industrial companies here.

How have Union Pacific’s revenues changed over recent quarters, and what’s the forecast for Q1 2019?

• Total Revenues for Union Pacific have largely trended higher over recent quarters.
• Revenues grew from $5.5 billion in Q4 2017 to $5.8 billion in Q4 2018.
• The growth can primarily be attributed to the capacity constraints in the trucking industry, which benefited railroad companies at large.
• We estimate total revenues to be $5.7 billion for Q1; a figure 4% higher than what it reported a year ago.

What are Union Pacific’s key sources of revenues?

• Union Pacific generates its revenues primarily from various commodities freight, including energy, industrial, premium, and agriculture.
• Premium segment includes intermodal freight, which refers to the shipment of containers that can be moved from one form of transport to another. The segment also includes automotive freight.
• Energy segment refers to shipments related to coal, crude oil, sand, and petroleum products.
• Industrial freight revenues are derived from the shipment of industrial commodities.
• Agriculture refers to grains, fertilizers, ethanol, and biofuel related shipments.

What to expect from the Agriculture segment?

• Agriculture revenues grew from $1.01 billion in Q4 2017 to $1.12 billion in Q4 2018.
• We forecast the revenues to decline in low single-digits to $1.1 billion in Q1 2019.
• This can be attributed to uncertainties related to Agriculture exports.
• The U.S. government has imposed several foreign tariffs, which will likely impact the grain exports at large, and in turn impact the railroad shipments.

What to expect from the Energy segment?

• Energy freight revenues declined from $1.21 billion in Q4 2017 to $1.10 billion in Q4 2019.
• This can be attributed to weaker coal and sand shipments.
• We forecast the segment revenues to grow in mid-single-digits in the near term.
• While we don’t expect any significant growth in coal, petroleum products shipments will likely trend higher.
• The decline in domestic coal demand can largely be attributed to the trends in natural gas prices.
• The benchmark Henry Hub natural gas price is currently trading under $3 levels, falling from the highs of $4.50 in late 2018.
• With gas prices being more attractive, the dependency on coal as an energy source continues to come down.
• EIA estimates 603 million short tons (mst) coal consumption in 2019, which will be the lowest coal consumption over the past few decades.
• Coal exports have been trending higher in the recent quarters, but it may see a slight decline in 2019, thereby impacting the overall volume.

How much can industrial freight grow?

• Union Pacific’s industrial freight grew from $1.28 billion in Q4 2017 to $1.40 billion in Q4 2018.
• This can partly be attributed to higher fuel surcharge in the recent quarters, given the movement in crude oil prices.
• We forecast the revenues to grow in mid-single-digits in Q1.
• This growth will likely be led by chemicals, metals, and forest products, as an expected growth in construction will likely bode well for the railroad shipments.
• The U.S. construction sector is forecast to grow in mid-single-digits over the next three years.

How much can Premium segment revenues grow?

• Premium segment revenues have grown from $1.52 billion in Q4 2017 to $1.75 billion in Q4 2018.
• This can primarily be attributed to capacity constraints in the trucking industry amid driver shortage after the full implementation of the ELD Mandate.
• This trend will likely continue in the near term.
• We forecast the segment revenues to grow in mid-to-high single-digits in Q1 2019.

What will be the impact of the above on Union Pacific’s EPS?

• We expect the earnings to be $1.91 per share in Q1.
• This reflects 14% growth to the prior year quarter.
• The growth in earnings will likely be led by higher revenues, and higher margins.
• The company last year launched Unified Plan 2020 aimed at better 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.

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