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Union Pacific (UNP) Up on Q1 Earnings Beat, Sales Miss

There seems to be no respite for the Omaha, NE-based railroad operator Union Pacific Corporation UNP as declining coal shipments continue to hamper its results. As has been the case in the previous few quarters, coal played spoilsport for this key railroad player in the first quarter of 2016 as well.

Although the company’s earnings per share (on an adjusted basis) of $1.16 outshined the Zacks Consensus Estimate of $1.09, this was mainly due to the latter being pretty conservative after a number of downward revisions in earnings estimates over the past few months. 

 

On a year-over-year basis, earnings declined 11%. However, the earnings beat seems to have struck the right cord with the investors, driving the stock price in early trading.

Revenues decreased 14% year over year to $4.8 billion in the first quarter, falling short of the Zacks Consensus Estimate of $4.9 billion. The bulk of revenues at Union Pacific is derived from freight revenues. A 14% decline in freight revenues hurt the top line.

Declining coal shipments weighed on the railroad operator’s results yet again. Volumes slipped 8%, with coal being the biggest culprit. Apart from coal, decreasing volumes of industrial products, agricultural products and intermodal also led to the decline.

Operating income in the first quarter witnessed a decline of 15% year over year to $1.7 billion. Operating ratio (defined as operating expenses as a percentage of revenues) came in at 65.1% in the reported quarter as against 64.8% a year ago. During the quarter, the company bought back 9.3 million shares for $713 million.

Segment Details

Agricultural freight revenues were $882 million, down 6% year over year. Business volumes decreased 4% year over year and average revenue per car declined 2%.

Automotive accounted for $510 million of freight revenues, down 1% year over year. Business volumes were up 7% and average revenue per car fell 8% year over year.

Chemicals contributed $878 million to freight revenues, down 2% year over year. Volumes were flat while average revenue per car dropped 3%.

Coal revenues (freight) decreased 43% year over year to $519 million. Volumes declined 34% and average revenue per car fell 13% year over year.

Industrial Products generated freight revenues of $834 million, down 18% year over year on a 10% volume decline. Average revenue per car was down 9%.

Intermodal segment freight revenues went down 9% year over year to $879 million and volumes declined 3% year over year. Also, average revenue per car fell 6%.

Other revenues declined 10% to $327 million in the first quarter of 2016.

Liquidity

Union Pacific exited the first quarter of 2016 with cash and cash equivalents of $2,673 million, compared with $1,391 million at the end of 2015. Long-term debt stood at $14.79 billion at the end of the reported quarter as against $13.61 billion at the end of 2015. Adjusted debt-to-capitalization ratio increased to 47.1% from 45.7% at 2015-end.

Zacks Rank

Currently, Union Pacific has a Zacks Rank #4 (Sell). Better-ranked transportation stocks include Canadian National Railway Co. CNI, Canadian Pacific Railway Ltd. CP and China Eastern Airlines Corp. Ltd. CEA. All the three stocks sport a Zacks Rank # 1 (Strong Buy).

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