Earnings Preview 2013 Q3: Union Pacific (UNP) Transporting More Cars, Crude Oil As Coal Shipments Fall, Helping To Boost Profit 13%

 @David_Kashi on October 16 2013 10:54 AM
Union Pacific Railroad
A Union Pacific freight train. Volume and shipping rates in certain sectors have driven the company's Q3 profits. Reuters

Union Pacific Corporation (NYSE:UNP), one of the leading rail companies in North America, will see a profit gain of 13 percent in the third quarter as stronger prices for vehicle, chemical and crude oil shipments offset decreased coal and agricultural shipments.

Analysts polled by Thomson Reuters expect Union Pacific, which reports earnings Thursday before markets open, to report net income of $1.16 billion, or adjusted earnings per share of $2.50, compared with last year’s third-quarter net income of $1.04 billion, or $2.19 per share. Revenue is forecasted to rise to $5.6 billion from $5.34 billion in the year-ago period.

However, the Omaha, Neb., company, whose Union Pacific Railroad operating unit has 31,900 route miles in 23 states and employs 45,700, recently cut its earnings and revenue outlook, saying it will miss Wall Street expectations.

Coal shipments have dropped to their lowest levels in 20 years, attributable to the abundance of cheap natural gas plus new environmental standards curbing carbon emissions. One goal of President Obama’s climate policy is to reduce greenhouse-gas emissions 17 percent by 2020 from 2005 levels.

Analysts also say that Union Pacific, the largest railroad operator in the S&P 500, is expected to report a continuation of its approximately 4 percent annual price increases for shipments, and that fuel surcharges included in its renegotiated contracts will further boost revenue, according to Trefis. Analysts further expect continued improvement in the company's operating ratio, the ratio of the company's operating expenses to its net sales. Union Pacific said it expects its operating ratio to improve by about 1.5 percentage points from the 66.6 percent recorded in the third quarter of last year.

Coal shipments also declined in the third quarter because of floods in Colorado that damaged railway lines, reduced shipments by 6 percent and cut into operating income by about $10 million, Union Pacific said.

An increase in the volume of automobile, chemical and crude oil shipments, which generate higher marginal rates than coal shipments, has offset the effect of reduced coal shipments, according to Standard & Poor, and resulted in an overall shipment volume roughly flat for third quarter.

In addition, the "housing recovery and increased shale-gas drilling activity seen in the U.S. will boost shipments of industrial products," Trefis said.

Earlier this month, Union Pacific cut its earnings forecast to a range of $2.45 to $2.48 per share on a projected gain in operating revenue of 4 percent to 4.5 percent.

"Mild summer weather combined with disruptions from flooding in Colorado impacted coal volumes, and, to a lesser extent, other commodity shipments. In addition, an uncertain economic environment continues to impact intermodal volumes."

The company's financial performance in the third quarter has allowed it to boost its dividend in Q3 by 10 percent to 79 cents per share. That results in a 2.02 percent dividend with a payout ratio of 36 percent of trailing 12-month earnings.

"We're generating strong cash flows and have confidence in our ability to continue to earn reinvestible returns on our diverse franchise opportunities," Rob Knight, chief financial officer, said in a statement.

 

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