(The Associated Press circulated the following on April 18.)
NEW YORK — Union Pacific Corp. reports earnings for the first quarter on Thursday before the markets open. The following is a summary of key developments and analyst opinion related to the period.
OVERVIEW: As the nation’s largest railroad, Omaha, Neb.-based Union Pacific operates 32,400 miles of track in 23 states from the Midwest to the West and Gulf coasts. Like its Class I competitors, brisk demand for certain commodities and solid pricing has driven upside earnings reports from Union Pacific in recent quarters. But it appears continued weakness in the housing and automotive industries, coupled with bloated inventories at retailers and severe weather during February and March could finally put the brakes on quarterly gains by the group.
Union Pacific said in its fourth-quarter profit report that weather likely reduced shipping volume by 4 percent to 5 percent in January. Those remarks came before some of the season’s harshest weather in February and a storm in March that closed mines and halted coal shipments in Wyoming’s Powder River Basin, where Union Pacific and western rival Burlington Northern Santa Fe Corp. enjoy exclusive rail access.
Union Pacific said a storm that dumped more than 2 feet of snow on the mine area and caused flooding and road closures kept it from loading 160 coal trains in the last week of the quarter, but the company also said at the time that it did not expect the missing loads to affect results. Nonetheless, analysts expect to see weather-driven cost pressures in the quarter, regardless of their origins.
Meanwhile, demand also slowed during the quarter, with particular softness in automotive and agricultural freight, Union Pacific Chairman Jim Young said at a conference on March 22.
“We thought the first quarter would be weak,” he told analysts at the event.
The sector’s most significant financial development, however, came shortly after the first quarter closed, when billionaire investor Warren Buffett’s company, Berkshire Hathaway, became the largest investor in Burlington Northern and took positions in two other unnamed railroads. News of the investment sent shares of Union Pacific, Burlington Northern and eastern railroad CSX Corp. to 52-week highs and analysts think it will offer continued support to the stocks should they deliver weaker quarterly earnings.
BY THE NUMBERS: The company said in January that it expected a first-quarter profit in the range of $1.25 and $1.35 per share. Analysts polled by Thomson financial forecast a profit of $1.28 per share.
ANALYST TAKE: John Larkin, an analyst at Stifel Nicolaus & Co. said Union Pacific has indeed felt the pullback in industrial freight demand, as it hauls most of the automobiles and chemicals shipped in the West, but its earnings benefit from a more diverse customer base. “Surprisingly little overall softness has been seen to date given the extent to which the economy has slowed, thanks to grain, coal, and the company’s exposure to the most modern and efficient auto plants,” Larkin said in a recent research note. Larkin, however, still considers Union Pacific a risk to miss expectations.
Salvatore Vitale, an analyst at Calyon Securities, said volume and operating performance for the quarter suggest a miss. “But pricing strength is the obvious wild card,” he said.
WHAT’S AHEAD: Among the rail names, Union Pacific might contain the most upside, said Thomas Wadewitz, an analyst at J.P. Morgan Securities. He said Union Pacific carries the industry’s largest portion of legacy contracts, or deals with customers that will soon come up for repricing at likely better rates, and has the most room for operational improvements.
STOCK PERFORMANCE: Shares of Union Pacific gained 9.4 percent during the quarter.