Union Pacific Corporation (UNP): Choo …. Choo

Posted on Oct 23 2015 - 12:43am by Sharpe Trade

When I listen to the conference call of a company, I take some notes. And therefore … I thought that to help out new folks as they navigate conference calls, I would start posting my notes, as I’ve taken them. Perhaps, we can make this a continual feature here at Sharpe Trade with the stocks that we have mentioned in the Sharpe Income project.

Union Pacific (UNP) reported earnings on the 22nd of October, after which the stock’s price rose almost 4%. As I have mentioned previously here on Sharpe Trade, this is a stock that I use in the equities section of my own personal income accounts, and we currently hold within the ‘Sharpe Income’ project.

Union Pacific Corp (UNP) – Daily Chart


So what’s ‘the skinny’ this quarter?

You can find my notes on last quarter’s earnings here, and as follows are a few notes from my desk as I listened to this quarters Conference Call

Union Pacific (UNP) – October 22, 2015

  • $1.42(7) Est. / $1.50 in Actual EPS.
  • Net Income … 1.3 Billion in Net Income. 
  • Operating Revenue just under $5.6 billion in the quarter, down 10% versus last year.
  • Earnings per share (EPS) of $1.50 down 2 percent from $1.53 a year ago.
  • Solid core pricing gains.  It’s down to 3.5% in Q3, but it began at 2% in the first quarter of 2014, and has enjoyed a steady linear average higher since that time.
  • However, volumes slid again, as they have been in previous quarters.  This quarter, volume was down 6.5%.
  • Carload volume declined in 5 of 6 commodity groups with coal down the most at 15%.
  • Automotive was the one commodity group with a year-over-year increase in the quarter with carloads up 5% versus 2014.  Automotive revenue was flat in the third quarter as a 5% increase in volume was offset by a 5% reduction in average revenue per car.  Finished vehicle shipments were up 5% this quarter, driven by continued strength in consumer demand. The seasonally adjusted annual rate for North American automotive sales was 17.8 million vehicles in the third quarter, up 6% from last year.  Outlook for remainder of the year sees automotive as remaining strong.
  • On the cost side, made significant progress aligning resources to current drop off in demand.  There was a record operating ratio, as the quarterly record operating ratio of 60.3%.  And amazingly, they still think there is room for further productivity improvements.
  • Core pricing gains of 3.5%
  • Revenue per car declined 4% in the quarter.
  • Lower average revenue per car drove a 10% reduction in freight revenue.
  • Soft Ag Export Grain Demand had Ag products revenue down 4% on a 3% volume reduction and a 1% decrease in average revenue per car.
  • Grain volume down 11% in the third quarter. The strong US dollar and high worldwide inventories reduced grain exports by 32%.  Outlook for remainder of the year is uncertain, given global supply.
  • July and August saw the largest domestic Soybean Meal crush on record, resulting in a 17% increase in soybean meal shipments.
  • Chemicals revenue was down 6% for the quarter on a 3% reduction in both volume and average revenue per car.
  • Coal revenue declined 18% in the third quarter on a 15% volume decline and 4% decrease in average revenue per car.  Outlook for remainder of the year on Coal is not optimistic, as Natural Gas prices are driving Coal usage lower.
  • Industrial products revenue was down 16% on a 12% decline in volume and 4% decrease in average revenue per car during the quarter. Reduction in shale drilling resulted in a 31% decline in minerals volume, primarily driven by a 36% decrease in frac sand car loadings.
  • Metals volume was down 26% as lower crude oil prices suppressed drilling related shipments and the strong US dollar drove increased imports.
  • Intermodal revenue was down 11% in the third quarter on a 4% lower volume and a 7% decrease in average revenue per unit. Domestic intermodal volume was up 1% in the third quarter.
  • Employee safety record improved 12% to a record low of 0.92 reportable incidents per 200,000 employee hours.  Rail derailments increased however, by 17% to 3.56 incidents per Million Train Miles.  Public accidents increased only slightly, from 2.21 in 2014, to 2.25 Crossing Accidents per Million Train Miles.
  • Improvement in Service Delivery.
  • Operating, they have furloughed more employees and offered alternative work initiatives, decreasing employee cost impact by 10%, and more Locomotives have been stored, down to 7,130 Active Locomotives (began with 7,929 at the beginning of the year).  What remains in the fleet, they are running record train lengths.
  • Outstanding share balance declined 3% as a result of buybacks.  Most of all the buybacks came in the third quarter, when stock price was depressed, and was why they increased the buybacks.  It won’t be a linear ‘stick’ at these levels.  It was simply an opportunistic move.  Smart.
  • Cash flow, year-to-date cash from operations increased to just over $5.6 billion.  Invested around $3.3 billion in cash capital investments through the first three quarters.  On the Balance Sheet, adjusted debt balance grew about $1.6 billion through the first three quarters of this year.  Taking adjusted debt to cap ratio to 44.5%, up from 41.3% at year-end 2014.
  • Questions and Answers: Began at 25:20. Operating Ratio Improvement?  Although they just hit 60.8 on the Operating Ratio, they stated they believe there are almost limitless opportunities for us to continue to improve.  Stated they only count what actually moves. So, they calculate the yield, the price. So, the point being, volume has an impact clearly on reported price.  Focus on pricing remains unchanged moving forward.  On Port Disruptions:  Probably a couple 3% points of share that migrated over to the east coast ports during the port strike that has not migrated back.  They think some of that is just some short term risk management, and UNP believes that ultimately the cheapest best fastest supply chain will win and that still is west coast ports.  On Train Length Productivity:  Train side equates at about 6000 feet and almost 90% of our network is 7200 feet capable.  So room to grow there.  On Macro Environment:  When do you feel this business can get back to more of a GDP or a GDP plus growth environment versus the declines we’ve seen year-to-date?  Answer was … we feel very strong, very bullish on the intermodal product in general that in the long run is going to be driven in large part by U.S. consumers and consuming both international product as well as domestic product. It’s also predicated on our ability to have a service product that can penetrate against a truck. And all of those secular dynamics are set up positively for the long run. In terms of dislocations that are happening in the short term, it’s hard to time things out. It is very dependent on what happens in the U.S. economy, what the jobs pictures look like what the earning picture for consumers look like, what the U.S. dollar is doing. Adds then to all that, we’re focused on controlling what we can control which is an excellent service product. We got the best franchise from a domestic and international intermodal perspective in the U.S. and that will serve us well over the long run .

So as we have noted in previous coverage of Union Pacific (UNP) as a company, shipping volumes has dropped once again.  But their increased efficiency in running their business (furloughing and decreasing employee cost impact through alternative work and other intiatives and storing less efficient Locomotives) has surprised everyone. 

Basically, they are running the company meaner and leaner, if there is not as much cargo to ship within the country.

I’m duly impressed.  I was somewhat expecting them to earn below expectations. I was not expecting them to beat by 8 cents.  

If they can manage assets this well during a steep decline in volumes, what will the company look like when it is on a Golden Run?

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