Why Didn’t Union Pacific Drop Though 2019 Revenues Shrank?

by Trefis Team
Union Pacific Corporation
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The stock price of Union Pacific (NYSE:UNP), one of the world’s largest railroad companies, is up over 25% since the beginning of 2019. But how did the company pull off such gains, as its revenues declined 5% in 2019? Well, there is a valid reason, of course. As it turns out, the net earnings margins (profits as a percent of revenues), expanded 120 bps y-o-y to 27.3% in 2019, driven by the company’s focus to reduce its operating ratio, which declined from 62.7% in 2018 to 60.6% in 2019. With the company focused on reducing its operating ratio further, investors have revised their expectation for future earnings growth from Union Pacific. Our dashboard on Union Pacific’s Revenues And Stock Price Change Mismatch provides the key numbers behind our thinking, and we explain more below.

What Brought About A Change In Margins & Multiple?

The expansion in Union Pacific’s Margins was brought about by a 10% decline in the company’s biggest expense item, compensation and benefits, due to a mix of lower volume related costs and employment tax refund. Railroad fuel prices trending lower in 2020 will also help save fuel costs, which account for roughly 5% of the company’s total expenses.

The decline in Union Pacific Revenues can be attributed to lower energy shipments, as lower natural gas prices have resulted in lower demand for coal, and lower premium (includes automotive and intermodal) shipments, due to the increased trucking capacity and lower light vehicles production.

The margins going from 26.1% to 27.3% coupled with a 6% decline in shares outstanding from 754 million to 706 million, partly offset by a 5% decline in revenues, has meant that the earnings per share grew 6% from about $7.95 per share in 2018 to $8.41 a share in 2019.

Finally, the expansion of the P/E Multiple from 17x to 21x between 2018 and 2019 also contributed to the stock price growth. But what led to multiple expansion despite lower revenues?  It is primarily due to the expectations of improved margins going forward. The company during the past few years has been focused on reducing its operating ratio, and its big expense items, including compensation and benefits, when looked as a percentage of revenue, have been on a decline. This trend will likely continue going forward as well, given that the company aims to achieve 55% operating ratio over the next few years (vs. 61% currently). This compares with an operating ratio of 58% for CSX Corporation (NYSE:CSX), and 65% for Norfolk Southern (NYSE:NSC).


Looking for more insights on freight & logistics companies? Look at UPS vs. UNP: Does The Stock Price Movement Make Sense? and Looking Back: Why Is Fedex Down 50%?

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