Thursday, April 19, 2012

UP 1Q profit up 35%

Written by  Douglas John Bowen and Luther S. Miller

Union Pacific Thursday reported its first-quarter profit was $863 million, or $1.79 per share, in the first quarter of 2012, up dramatically from $639 million, or $1.29 per share, in the first quarter of 2011, and handily beating Wall Street expectations of $1.64 per share.

UP revenue grew 14% during the quarter to $5.11 billion from $5.5 billion a year ago. UP acknowledged a significant decline in coal carloads, but said its five other business sectors have performed well enough to compensate for that loss. One such compensation factor is a growth in hauling materials to and from new shale-oil drilling sites. Total carloads for the quarter rose 1%.

Union Pacific's operating ratio of 70.5% was a first-quarter record, 4.2 points better than the previous first-quarter record set in 2011.

Average quarterly diesel fuel prices increased 12% to $3.23 per gallon in the first quarter 2012 from $2.88 per gallon in the first quarter of 2011.

"The Customer Satisfaction Index of 93 set a new all-time quarterly record and was two points better than the first quarter 2011," said UP. "Quarterly train speed, as reported to the Association of American Railroads, was 26.3 mph, increasing 1% compared to the first quarter of 2011."

"With a strong first quarter behind us, we're focused on the prospects that lie ahead," Union Pacific Acting President and CEO Jack Koraleski said. "Although softer coal demand remains a challenge, the benefits of our diverse franchise should support continued opportunities in other markets, driving record fianancial results for the year."

UP held to predictions of continued growth in the second quarter and throughout 2012.

Notwithstanding the company's performance and optimistic if cautious earnings forecast, Wall Street seemed to take a dim view of the results Thursday. Shares of UP were down better than 4.3% in midafternoon trading on the New York Stock Exchange.

Said Dahlman Rose & Co. Director-Transportation and Railway Age Contributor Jason Seidl, “Record revenue, operating ratio, and earnings were not enough to rally investors concerned about further coal downside. We are raising our earnings estimates to reflect the earnings beat. Our new 2012 EPS estimate for UP is $8.05 vs. our prior estimate of $7.90. Our 2013 EPS estimate changes to $9.20, from $9.10. We are maintaining our price target of $126. UP’s record results highlight the company’s ability to be agile in responding to prolonged weakness in one of its key businesses, something to which investors should assign value, and they do not appear to be doing so, at least not immediately following the release. We do not believe that the discount at which the shares are trading is justified. Accordingly, we maintain our Buy rating.”

Commented Morgan Stanley analyst William Green, “UP remains positioned to outperform peers even if coal remains an overhang given: (1) management confirmed that earnings will grow year-over-year in 2Q12 and 2012, even incorporating coal weakness; (2) management made it clear that the company has no interest or economic incentive to cut coal rates; and (3) more than peers, UP’s coal franchise, both through volume and on price (due to mix) is more levered to a moderate natural gas rebound. Higher revenues from strong core pricing and productivity gains from mild weather drove UP’s operating beat. Furthermore, even after including the impact of the coal overhang, management maintained their 65%-67% by 2015 operating ratio target.

 Reiterating our attractive view of freight—railroads in particular—the Class I’s remain compelling investments due to: (1) incremental margins poised to exceed expectations; (2) sustained momentum on core price; (3) continued share buyback activity; and (4) upside to current trading multiples. As a result, we continue to favor railroads within our freight universe.”