(Reuters circulated the following article on January 24.)
NEW YORK — Union Pacific Corp. (UNP.N) on Monday said fourth quarter earnings fell sharply as the nation’s largest railroad struggled with high fuel prices and service disruptions amid last year’s record freight volume and said the year was off to a difficult start.
U.S. economic expansion and surging global trade boosted freight volume last year, but Union Pacific was not as well prepared for the boom as its peers. The company, considered a gauge of economic activity because of the varied cargo it hauls, struggled with traffic bottlenecks and faced crew and locomotive shortages.
The company was hit further by this month’s West Coast storms. Executives said first-quarter earnings would be sharply lower from a year ago, but added the railroad was focusing on cutting costs related to congestion and slow trains and getting more price flexibility as contracts come up for renewal.
“They were able to say they expect their new plan to produce quantifiable results in the second quarter and real change by the second half, and that I think is more definitive than I’ve heard in the past,” said independent railroad analyst Tony Hatch.
Nevertheless, Jason Seidl, an analyst at Avondale Partners, said he thinks the stock will stall until the company shows improved service metrics, probably in the second quarter.
Union Pacific shares closed down more than 2 percent, or $1.47, at $58.94 on the New York Stock Exchange.
Fourth-quarter net earnings tumbled to $79 million, or 30 cents a share, from $551 million, or $2.12 a share, a year earlier. Operating revenue rose 8 percent to $3.2 billion, driven by an increase in hauling of commodities.
The earnings included a non-cash charge of $153.6 million linked to estimated liabilities for asbestos-related claims.
Excluding the asbestos-related charge, earnings were 88 cents a share — a penny above the top end of Union Pacific’s most recent forecast and 4 cents better than the average forecast among analysts polled by Reuters Estimates. Year- earlier operating earnings were $1.28 a share.
“We clearly left a lot of opportunity on the table last year and we plan to correct that this year,” said Chief Executive and Chairman Dick Davidson on a conference call. He added that no one in the executive ranks would be paid bonuses because of the poor 2004 performance.
While Union Pacific is still assessing the impact of the West Coast storms, the company expected earnings of 25 cents to 35 cents a share in the first quarter on revenue growth of 4 percent to 6 percent, depending on whether business was lost due to the weather or was deferred. Fuel prices are also a wild card.
In a statement, Union Pacific said its initial estimate for storm costs could be near $200 million — about half for repairs and the rest due to lost revenue and higher costs. That estimate, which could half first quarter earnings, does not include insurance recovery.
Despite the rocky start to the year, executives were optimistic about continued shipping demand and pricing power and said the company was implementing new plans to address bottlenecks, simplify operations and better manage volume.
One initiative is to move away from long-term contracts often characterized by steep discounts toward public pricing, which allows for more pricing flexibility, and enables better traffic management and fewer administrative burdens.
The company also plans to hold volume growth to about 1 to 2 percent to limit traffic and improve profitability. It expects 2005 revenue growth of 5 percent to 7 percent, with much of that likely coming from higher rates, analysts said.
“They are making a statement that return on capital and getting their system together is important,” Hatch said of the measured volume growth target.