Thursday, July 23, 2009

UP reports better-than-expected 2Q results

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Union Pacific Corp. Thursday said its second-quarter profit was better than expected despite lower freight volumes and revenue, and said the economy appears to have stabilized.


UP net income of $468 million, or 92 cents per share, was down 12% from the second quarter of 2008, when it notched $531 million, or $1.02 per share. Excluding a one-time benefit from a $72 million land sale, UP reported earnings per share of 78 cents, better than the consensus estimate of 74 cents anticipated by Wall Street.


Quarterly revenue fell to $3.30 billion from $4.57 billion in the comparable 2008 period; analysts had expected $3.38 billion. Freight volume fell 22% during the quarter, UP said.

“Although we expect it will be some time before the economy recovers," Chief Executive Jim Young (pictured at right) said, "it appears that volume levels may have hit the bottom as the economy seems to have stabilized.”

New York-based investment bank Dahlman Rose & Co.concurs. In a note July 24, the company said, “Although the economy will likelyprovide near-term challenges for Union Pacific, the railroad has clearly showedus its ability to truly weather the storm. Indeed, once freight levelseventually return, UNP has ample capacity to take them on without spendingsignificant excess capital. We continue to believe that the company’s trueoperating ratio lies somewhere south of 70% in a more normalized economicenvironment. Accordingly, we reiterate our Buy rating on the company’s shares.”

Said Morgan Stanley & Co. analysts William Greene and Adam Longson: “Consistentwith our forecast for an auto-led volume rebound in 2H09, UP management firmlyreiterated recent comments from other rails that volumes have likelybottomed. Having some of the easiest volume comparisons among the railsin 3Q and a large auto franchise, we believe that UP could post one ofthe better volume recoveries later this year as auto productionrebounds.

"Furthermore, new intermodal volumes from Hub Group shouldramp through 2H09 and further boost  volumes. As these volume trends play out, we expect earnings revisions to improve across the rails, but at UP in particular. We expect much of UP's recentproductivity gains achieved in the downturn to be sustained as volumesrebound, driving substantial operating leverage. Management has notedthe company could easily add 10% more volume without adding anothertrain start.

"We expect UP to outperform," Morgan Stanley said. "We aresignificantly above consensus on 2010 EPS ($4.65 vs. $4.30) even thoughwe assume a tepid rebound and pricing slows materially. UP is particularly leveraged to an auto-led rebound and has easy 2H09 and 1H10 comps. In our view, UNP has the potential for large productivity gains and recent results confirm management is executing."


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