(The following appeared at SeekingAlpha.com on November 9.)
Union Pacific (UNP) is one of two major railroad operators in the western U.S. Its network includes over 32,000 route miles covering 23 states, which includes access to the Canadian and Mexican borders and the Gulf and Pacific coasts. Its fleet includes over 8,700 locomotives and 94,000 railcars.
Energy freight accounted for 20.7% of year-to-date revenue. It consists of coal shipments to utility and industrial facilities, and the transport of coal to barge and shipping ports. Industrial Products freight accounted for 18.7% of revenue. Shipments include lumber, steel, aggregates, cement, roofing materials, paper products, consumer goods, nonferrous metals, and industrial minerals.
Agricultural freight accounted for 17.4% of revenue. It primarily transports whole grains, such as corn and wheat, to grain processors, animal feed companies, and ethanol producers. It also transports fruits, vegetables, dairy products, beverages, meat, and poultry. Intermodal freight accounted for 16.9% of revenue. Intermodal containers are used primarily for transporting finished consumer goods.
Chemical freight, such as liquid and dry chemicals, plastics, liquid petroleum products, soda ash, and fertilizer, accounted for 14% of revenue. Automotive freight, including domestic and imported vehicles and parts, accounted for 7.6% of revenue.
The remaining 4.7% of revenue was generated from commuter rail operations and various services including storage and switching.
Companies seeking cost savings have been shifting to railroaders from truckers. Trains tend to be slower but have better fuel efficiency. Soaring diesel costs, environmental concerns, and increased highway congestion have only made railroaders more attractive.
However, volumes have come under pressure led by sharp declines in the automotive and construction industries. These declines have been largely offset by the growing global demand for food and energy. Profits continue to grow thanks to successful pricing and productivity initiatives. In the first nine months of 2008, the operating profit margin expanded 70 basis points year-over-year to 22.5%. Improving metrics include higher average train speed, lower average dwell time, and increased gross ton-miles per employee.
Q3 net revenues increased 15.6% year-over-year to $4.8 billion as higher average prices more than offset lower volume. Higher prices and improved productivity more than offset soaring fuel costs. The operating profit margin expanded 109 basis points to 25.07%. Net income jumped 32.1% year-over-year to $703 million or $1.38 per share.
The outlook for 2009 is uncertain given the state of the economy. A longer or deeper-than-expected recession could lead to significantly lower volumes. Also, the sharp decline in diesel prices may make trucking more attractive to customers. Yet we believe rail transport’s cost efficiency will continue to play well with customers. UNP expects 2009 volumes to be flat to down 2%. But price increases should drive revenues higher. Coupled with further improvement in productivity, 2009 earnings could see low double-digit growth. For Q4, management expects volumes to decline around 5% year-over-year. But higher prices and improved productivity should help earnings per share grow 34-45% year-over year to $1.25-1.35.