Union Pacific reported an all-time best operating ratio of 59% in 2020’s first quarter, based on net income of $1.5 billion, or $2.15 per diluted share. This compares to $1.4 billion, or $1.93 per diluted share, in first-quarter 2019. “Against the backdrop of the emerging COVID-19 pandemic and a challenging volume environment, we leveraged productivity to deliver strong financial results,” said Chairman, President and CEO Lance Fritz. “We also made substantial improvement in employee safety, which is a testament to our dedicated employees. Our rail network has never run better, providing a safer, more reliable and efficient service product to our customers.”
Operating revenue of $5.2 billion was down 3% in 1Q2020, compared to 2019. Business volumes, as measured by total revenue carloads, decreased 7%. In addition:
- Quarterly freight revenue declined 3%, compared to 1Q2019, as positive business mix and core pricing gains were offset by lower volumes and decreased fuel surcharge revenue.
- Union Pacific’s 59% operating ratio represented a quarterly record and the fourth consecutive quarter below 60%, improving 460 basis points (bps) compared to 1Q2019.
- The $1.87 per-gallon average quarterly diesel fuel price in first quarter 2020 was 10% lower than first quarter 2019.
- Fuel consumption rate, measured in gallons of fuel per thousand gross ton-miles (GTMs), improved 5%9, achieving a first-quarter record in 2020.
- The reportable personal injury rate of 0.80 incidents per 200,000 employee-hours decreased 11% compared to 1Q2019.
- Quarterly freight car velocity was 209 daily miles per car, an 8% improvement 2019.
- Quarterly locomotive productivity was 131 GTMs per horsepower-day, an 18% improvement compared to first quarter 2019.
- Average maximum train length was 8,396 feet (1.6 miles), a 15% increase compared to 1Q 2019.
- The company repurchased 14.3 million shares in 1Q2020 at an aggregate cost of $2.6 billion.
- Industrial traffic rose 3%, while Bulk and Premium dropped 5% and 6%, respectively.
UP said it expects 2Q2020 carload volumes to be down around 25%, compared to the second quarter 2019. “Although the situation is fluid and highly uncertain, the company fully expects to maintain sufficient liquidity to sustain an extended period of lower volumes. Our first priority is the health and safety of our employees during the COVID-19 pandemic, as they perform the work necessary to move the goods communities need during this national emergency. The 18-month implementation of Unified Plan 2020 has put our company in a position of strength, with a strong balance sheet and ample liquidity, as we face today’s fluid and uncertain situation. We remain focused on providing a highly consistent, reliable and efficient service product for our customers.”
Download UP’s 1Q2020 Earnings Presentation:
“Union Pacific is one of the best-managed North American Class I railroads and the only western one that is publicly traded,” says Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “With the hire of Jim Vena as COO, we believe the company is on its way to OR improvement through adoption of Precision Scheduled Railroading. UP flexed its PSR-driven improvements in 1Q2020, with cost-cutting driving a strong EPS beat and the top line slightly ahead. 2Q2020 volume outlook of a 25% decline is staggering but unsurprising; PSR should greatly help in cushioning the blow, even if margins do deteriorate a bit. We rate UP Outperform with a price target of $163.
“UP’s first-quarter EPS of $2.15, up 16% y/y, is well above our $1.75 estimate and consensus’ $1.90 expectation. Operating income increased 9% to $2.14 billion, above our and the Street’s $1.81 billion and $1.96 billion expectations, respectively. The all-time quarterly OR record of 59.0% was roughly 460 bps better than last year, roughly 470 bps better than our estimate, and approximately 280 bps better than consensus’ expectation.
“Quarterly revenues declined 3% to $5.23 billion, above our and consensus estimates of $4.99 billion and $5.11 billion, respectively. By carload type relative to consensus, bulk, industrial and premium revenues beat, though industrial only beat by $10 million. Unsurprisingly, management withdrew full-year guidance for all items. They are also reducing capex by $150 million-$200 million and suspending share repurchases while maintaining the current dividend.
“UP’s operational gains were significant in the quarter, helping offset volumes that declined by 7.0% and in our view positioning the railroad well for what will be a very difficult 2Q2020 on the top line. Performance metrics have greatly improved since UP began implementing PSR. This quarter, metrics including velocity (+8%), terminal dwell time (–11%), locomotive productivity (+18%) and trip plan compliance (+19%) all showed impressive improvement.
“With 2Q2020 volume expected to decline by roughly 25%, we believe that management still has levers to pull in PSR implementation that could help offset the weak business environment. Further headcount reduction is expected, additional yard closures are a possibility, and even as management wouldn’t give a figure for just how many locomotives were parked in the quarter—the number was so large management noted it was almost embarrassing—more equipment could still be parked.
“We are adjusting our 2020 and 2021 EPS estimates to $7.35 and $9.05 from $8.15 and $9.45, respectively. We are also increasing our multiple to 18x (in line with the company’s average historical multiple) to account for the company’s PSR success thus far (only roughly halfway there), including impressive cost cutting in a quarter where volumes were challenged. Indeed, UP is well-equipped to not only make it through the terrible near-term freight conditions, but is likely to come out stronger on the other side. With its service product improving, UP is more likely to take business off the highway.”