What Does Union Pacific Spend Most of Its Money On, Fuel Or Compensation?

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Union Pacific

Union Pacific (NYSE: UNP) spends most of its money on compensation & benefits for its employees, which accounted for 30% of the company’s total expenditure in 2018. Fuel and depreciation accounted for roughly 15% each of the company’s total expenses. Union Pacific has seen steady growth in its revenues and expenses over the past few years. However, it has managed to bring down its total expenses as a percentage of revenues, led by the company’s focus on reducing its operating ratio. In this note we discuss the key drivers of Union Pacific’s total expenses. You can look at our interactive dashboard analysis ~ How Does Union Pacific Spend Its Money? ~ for more details.

Compensation & Benefits Account For Nearly One-Third of Union Pacific’s Total Expenses.

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Union Pacific’s Total Expenses As Percentage of Revenue Has Been On A Decline, Driven By The Company’s Focus On Reducing Its Operating Ratio.

Breaking Down Union Pacific’s Total Expenses

Compensation & Benefits:

 

  • Compensation & Benefits, which accounted for 30% of the company’s total expense in 2018, includes employee related costs, and post-retirement benefits.
  • Compensation & Benefits as % of revenue has declined over the years from 23.8% in 2016 to 22.1% in 2018. Trefis estimates the metric to decline further to 21.4% in 2020.

Depreciation:

  • Depreciation accounted for 15% of the company’s total expenses in 2018.
  • Depreciation as % of revenue grew slightly from 10.2% in 2016 to 11.1% in 2018. We expect the figure to see modest growth to 11.7% in 2020. This can be attributed to the expected investments in the infrastructure to cater to railroad demand.

Fuel:

  • Fuel accounted for 14% of the company’s total expenses in 2018. It refers to the cost of locomotive fuel as well as other fuel used in railway operations.
  • Fuel as % of revenue increased from 7.5% in 2016 to 10.7% in 2018, following the growth in average fuel prices. WTI prices averaged $43 in 2016 and $65 in 2018. The figure will likely see a slight decline in the near term, led by lower crude oil prices in 2019, but grow thereafter led by higher volume.

Purchased Services & Materials:

  • Purchased Services & Materials, which accounted for 13% of the company’s total expense in 2018, includes the costs of services purchased from contractors.
  • Purchased Services & Materials as % of revenue declined from 11.3% in 2016 to 9.6% in 2018. Trefis estimates the metric to decline to 9.1% in 2020.

Equipment, Rent & Others:

  • Equipment, Rent & Other accounted for 12% of the company’s total expenses in 2018. It refers to costs associated with operating joint facilities, and equipment rentals, and the repair and maintenance of the assets.
  • Equipment, Rent & Other as % of revenue declined from 10.7% in 2016 to 9.2% in 2018, and we estimate the figure to be around the 9.2% mark by 2020.

Income Taxes:

  • Income Taxes saw a sharp increase in 2017, due to the impact of the tax reform. The effective tax rate for Union Pacific stood at 23% in 2018, and we estimate it to remain more or less around the same mark in the near term.

Interest & Other Expenses:

  • Interest & Other Expense accounted for 5% of the company’s total expenses in 2018. Interest & Other Expense as % of revenue has hovered in the range of 2.2% to 3.4% over the last few years, and we estimate it to remain in the same range going forward.

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