Union Pacific Beats, Stock Tumbles - Analyst Blog

U.S. railroad giant Union Pacific Corp. (UNP) reported strong results for the fourth quarter of 2010. Quarterly net income reached a record high of $775 million or $1.56 per share compared to a net income of $549 million or $1.08 per share in the year-ago quarter.

Fourth quarter 2010 earnings per share (EPS) of $1.56 surpassed the Zacks Consensus Estimate of $1.48. This solid performance was achieved through a healthy operating ratio, massive growth in business volume, cost efficiency and pricing gains.

Total operating revenue, in the fourth quarter of 2010 was $4,410 million, up 17% year over year. This was also better than the Zacks Consensus Estimate of $4,343 million. Within this, total Freight revenue was $4,171 million, up 18% year over year. Quarterly Freight revenue of all the six business groups increased in the same quarter.

However, Union Pacific tumbled with respect to two crucial operating metrics in the fourth quarter of 2010. First, quarterly operating ratio (operating expense as a percentage of total revenue) was 70.2%. Although it was better than the year-ago quarter of 73.4%, it actually fell well below the previous quarter level of 68.2%. In fact, after two consecutive quarters of sub-70 level, operating ratio again moved up in the reported quarter.

Second, quarterly business volume (measured by total revenue carloads) was 2.237 million, up 9% year over year. For the third consecutive quarter, all six business groups of Union Pacific posted volume growth in the same quarter. But this growth rate was significantly below the growth rate of 14% in the third quarter and 18% in the second quarter. Notably, the company's business volume growth rate declined for three straight quarters.

Quarterly Consumer Satisfaction Index was 90% compared to 88% in the year-ago quarter. Operating expenses in the fourth quarter of 2010 were $3,097 million, up 11% year over year. Quarterly operating income was $1,313 million, up 31% year over year. In the reported quarter, average revenue per car was $1,865, up 8% year over year. During the fourth quarter of 2010, the company repurchased approximately 2.5 million of its own shares for a consideration of around $224 million.

For full year 2010, Union Pacific generated $4,105 million of cash from operations compared to $3,204 million in the year-ago period. Free cash flow during the same time period was $1,415 million, compared to $699 million in the year-ago period.

At the end of fiscal 2010, Union Pacific had $1,086 million of cash and marketable securities on its balance sheet compared to $1,850 million at the end of fiscal 2009. Total debt, at the end of fiscal 2010 was $9,242 million compared to $9,848 million at the end of fiscal 2009. Debt-to-capitalization ratio at the end of the fiscal 2010 was 0.34 compared to 0.37 at the end of fiscal 2009.

Segment-wise Revenue

Quarterly total Freight revenue was $4,171 million, up 18% year over year. Within this segment, Agricultural revenue was $840 million, up 14% year over year.  Automotive revenue was $323 million, up 7% year over year.  Chemicals revenue was $617 million, up 14% year over year.  Energy revenue was $887 million, up 16% year over year.  Industrial Products revenue was $652 million, up 27% year over year. Intermodal revenue was $852 million, up 25% year over year. Quarterly Other revenue was $239 million, up 12% year over year.

Our Recommendation

The U.S. freight railroad industry is witnessing a gradual improvement since early 2010. As the U.S. economy continues to grow, demand for carriage is also expected to improve and the momentum is expected to sustain in the long run. We maintain our long-term Neutral recommendation for Union Pacific.

Currently, it is a short-term Zacks #3 Rank (Hold) stock. This was primarily due to Union Pacific's current valuation, which moved up by more than 61% in the last one year. Going forward, however, we see limited above market opportunity. Union Pacific competes with other freight railroad operators in the U.S. such as KansasCity Southern (KSU), CSX Corp. (CSX) and Norfolk Southern Corp. (NSC).

 
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