Thursday, July 19, 2012

Union Pacific 2Q beats Street, sets records

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Union Pacific Thursday reported second-quarter earnings of $1 billion, or $2.01 per share, up 28% from $785 million in the second quarter of 2011. Earnings, along with revenue of $5.22 billion in the quarter, outstripped Wall Street consensus analyst estimates of $1.97 earnings per share on revenue of $5.23 billion. Both categories were all-time highs for the company.

UP's fifth consecutive quarter of double-digit growth was fueled in part by increases in automotive movement (up 15%) and chemicals traffic (up 12%) compared with the second quarter of 2011, offsetting the decline in coal (down 17%) that has affected U.S. railroads large and small throughout 2012.

The Class I railroad's operating ratio declined to 67%.

"Volume growth across many of our market sectors offset the 17% decline in coal volumes," Chief Executive Officer Jack Koraleski said. "The net result was our best-ever quarter by nearly every financial measure."

Second-quarter sales rose 7.5% to $5.22 billion, in line with analysts' estimates, from $4.86 billion. UP also noted diesel fuel prices fell 2%, aiding the railroad's bottom line.

“UP delivered another quarter of record revenues and earnings,” noted Dahlman Rose & Co. Director and Railway Age Contributing Editor Jason Seidl.“Coal has moved past its trough, with stockpiles potentially normalizing later in the year if weather patterns are favorable. The second-quarter EPS of $2.10 was well above our and consensus estimates of $1.94 and $1.97, respectively. This result, which represented UP‘s highest-ever quarterly EPS, occurred as revenue rose 7%, to $5.22, also the highest quarterly result in company history. This compared to our and consensus estimates of $5.20 and $5.23, respectively. Also contributing to the strong earnings was the company‘s ability to manage costs, limiting the increase in operating expenses to 1%.

“Although coal volumes should be down throughout 2012, with y/y comparisons becoming even more difficult in the second half, on an absolute carloading basis, coal traffic declines hit a trough in 2Q12 and have been improving sequentially for the past five weeks. UP is now running about 30 PRB trains per day, up from 23 trains at the trough. If September proves to be hotter than average, and a repeat of last winter's unusually warm temperatures does not occur, utility coal stockpiles should near normal levels by the end of the year.

“We are raising our earnings estimates to reflect the earnings beat and improving outlook. Our new 2012 EPS estimate is $8.35 vs our prior estimate of $8.05.Our 2013 EPS estimate changes to $9.45, from $9.20. We are raising our price target to $132, from $126, based on applying the same 14x multiple to our new 2013 estimated EPS.UP is currently trading at 12.6x our new 2013 estimated EPS vs the Class I average of 14x. UP remains one of our favorite railroads due to sound execution, more legacy contracts to be re-negotiated, and the ability to be agile in responding to prolonged weakness in one of its key businesses.”