Friday, October 27, 2017

UP 3Q shakes off storm effects

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Lance Fritz. Lance Fritz.

Union Pacific Corp. had third quarter net income of $1.2 billion, or a $1.50 per share, up from $1.1 billion, or $1.36, in the year-ago quarter, on improved pricing despite flat intermodal volume and weaker overall carloads.

The Omaha-based railroad said operating income totaled $2 billion, up 3%, while the operating ratio was 62.8%, up 0.7 points.

Lance Fritz, Union Pacific chairman, president and chief executive, said that despite the effects of Hurricane Harvey in the quarter, “I am pleased with our results and look forward to continuing to build on the foundation provided by our six-track value strategy."

The railroad’s operating revenue of $5.4 billion was up 5% on-year as revenue carloads, declined 1%, as increases in industrial products were offset by declines in agricultural products, automotive, chemicals and coal. Intermodal volume was flat compared to 2016.

Quarterly freight revenue improved 4% on increased fuel surcharge revenue, core pricing gains and a positive mix of traffic.

Higher fuel prices negatively impacted the operating ratio by 0.3 points; the $1.77 per gallon average quarterly diesel fuel price was 13% higher than the third quarter 2016.

Quarterly train speed, as reported to the Association of American Railroads, was 25.4 mph, 2% slower on-year.

Union Pacific repurchased 11.8 million shares in the quarter at an aggregate cost of nearly $1.3 billion.

"As the economy continues to ebb and flow, we will focus on executing our value strategy. We will use innovation to enhance our customer experience while continuing to drive resource productivity throughout the organization as we progress our G55 + 0 initiatives," Fritz said. "Looking ahead to 2018, our engaged team is laser-focused on building upon our recent success. Our goal is to continue creating long-term enterprise value for all of our stakeholders as we improve our top-line and progress toward our margin improvement targets."

Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl said in a note to investors, “Price increases accelerated for the second consecutive quarter, and we believe this could continue for the foreseeable future as overall freight demand remains fairly solid, while capacity has tightened materially over the last few months. Excluding unusual items, [UP]'s results were a solid beat to our and consensus estimates. Management sounded somewhat more positive than it did on the 2Q call.”

The railroad “was still seeing pressure on the pricing side in its coal and intermodal business,” noted Seidl, adding management “was encouraged” by recent upward pricing trends in the trucking sector. “Excluding coal and intermodal, core pricing was [up] roughly 3%. The acceleration in pricing thus far this year is directionally consistent with what we have seen from other Class 1s, (except CSX),” and Cowen’s rail shipper survey.

Seidl raised his full-year earnings estimate $5.79 per share, up 10 cents, on continued price improvement and better volume outlook. Cowen also raised UP’s 2018 estimate to $6.45, from $6.25. “We are calling for 2% volume growth and a 3% increase in revenue per carload next year,” Seidl wrote. He pegs UP’s 2018 operating ratio at 61.3%, up 150 basis points from this year, and set a new target share price of $123, up $4.










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