Union Pacific Revenues Could See Slower Growth In The Near Term

Union Pacific Corporation (NYSE: UNP) generates its revenue from freight of various commodities, clubbed under five reported segments: Agricultural, Energy, Industrial, Premium, and Others. In this note we discuss the company’s business model, revenue growth in the recent years, and our view on future growth. You can look at our interactive dashboard analysis ~ UNP Revenues: How Does Union Pacific Make Money? ~ for more details. In addition, you can see more of our data for industrial companies here.

Union Pacific Generates Most of Its Revenues From Premium Freight.

• Agricultural refers to freight from grains, fertilizers, ethanol, and biofuel related shipments.
• 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.
• 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.

Union Pacific’s Business Model

• What Need Does Union Pacific Address?
  • Union Pacific is engaged primarily in freight transportation in the western two-thirds of the United States.
  • Union Pacific’s rail network is over 32,236 route miles, and it serves many large population centers in 23 states.
• Who Pays To Union Pacific?
  • Chemical producers, industrial manufacturers, agricultural companies, coal, oil & gas, and mining companies, steel processors, and automotive companies pay to Union Pacific to carry their goods.
• What Are The Alternatives To Union Pacific?
  • Union Pacific’s competitors include trucking companies, along with other railroad companies, such as Norfolk Southern, BNSF Railway, and CSX Corporation.
• What Are Union Pacific’s Competitive Advantages?
  • The company-owned tracks are a major strength of Union Pacific.
  • It owns around 80% of the tracks, while the rest are leased.
  • Union Pacific operates on key north/south corridors and it serves all six major gateways to Mexico.
  • The company also interchanges traffic with the Canadian rail systems.

Union Pacific’s Revenues Have Grown In Mid-Teens Between 2016-2018, And We Expect The Growth Rate To Slow Over The Next Few Years

• Union Pacific’s revenues have grown at an average annual rate of 7% from about $19.9 billion in 2016 to about $22.8 billion in 2018.
• This can be attributed to the full implementation of the ELD mandate, which resulted in capacity constraints in the trucking industry, and aided intermodal demand for the railroad companies.
• The revenues could grow to $24.5 billion in 2020, reflecting a low single-digit growth over the next two years, primarily due to the improved situation in the trucking industry, as well as the impact of the ongoing trade tensions, which could result in lower exports from the U.S.

Union Pacific’s Revenue Growth Has Been Primarily Led By Better Pricing, And This Trend Will Likely Continue In The Near Term

• Union Pacific’s revenues can be derived from number of carloads (volume) times average revenue per carload (pricing).
• The company’s total number of carloads volume increased slightly from 8.4 million in 2016 to 8.9 million in 2018.
• It will likely fall to 8.8 million in 2019, before moving higher to 9.1 million in 2020.
• This can be attributed to the ongoing trade tensions, which could have an impact on exports, along with the impact of a customer loss in the energy freight segment.
• Average revenue per carload grew from $2362 in 2016 to $2563 in 2018, and this trend could continue with low single-digit growth by 2020, led by pricing gains. 2019 could see slower growth in pricing, amid expected lower fuel surcharge revenue, as the oil prices have been declining, and the average Brent crude oil price of $63 for the year will be lower than that of $71 for 2018.

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