Union Pacific has reported third-quarter 2020 financial and operating results that “represent another step in our company’s transformation,” Chairman, President and CEO Lance Fritz said, emphasizing the positive aspects of what was largely a difficult quarter.
Net income of $1.4 billion, or $2.01 per diluted share, for 3Q20 was down 12% from $1.6 billion, or $2.22 per diluted share, in 3Q2019. Operating revenue of $4.9 billion fell 11%, compared to $5.5 billion in 3Q2019. Third-quarter business volumes, as measured by total revenue carloads, decreased 4% compared to 2019. Premium volumes increased compared to 2019, while industrial and bulk declined.
On the positive side, the operating ratio of 58.7% was an all-time quarterly record, improved 0.8 points compared to 3Q2019. Lower fuel prices positively impacted the operating ratio by 100 basis points, the railroad said. Quarterly freight car velocity was 220 daily miles per car, a 3% improvement compared to 3Q2019. Quarterly locomotive productivity was 138 GTMs (gross ton-miles) per horsepower day, an all-time quarterly record and an 11% improvement compared to 3Q2019. Quarterly workforce productivity was 998 car-miles per employee, an all-time quarterly record and a 13% improvement compared to 3Q2019.
Average maximum train length was 8,984 feet (1.7 miles), a 13% increase compared to 3Q2019. The reportable personal injury rate was slightly higher, 0.90 per 200,000 employee-hours for the first three quarters of 2020, compared to 0.82 for the same period in 2019.
“We demonstrated our ability to efficiently adjust to a sharp rebound in volume, which increased 19% from the second quarter, while operating expenses, excluding fuel price changes, increased only 11% sequentially,” Fritz said. “The results we are delivering, both operationally and financially, deepen our conviction that the changes we’re making to transform our railroad are on target and on track. An improved customer experience, coupled with a lower cost structure, is opening up new markets and opportunities to grow our business as we win with customers and convert more freight to rail.”
“An all time quarterly Operating Ratio record wasn’t enough as UNP’s [UP] 3Q20 results came up short of estimates,” said Cowen and Company analysts Jason H. Seidl (Managing Director and Railway Age Wall Street Contributing Editor), Matt Elkott and Adam Kramer. “Questions now turn to adding business back—4Q20 should be the [UP]’s first positive carload quarter since 4Q18—and to longer-term margin outlook. We roll our model forward to 2022 and move our Price Target to $216.”
Key takeaways from Cowen:
- “UNP reported third quarter EPS of $2.01, below our and consensus’ $2.12 and $2.06 expectations, respectively. Operating income fell y/y to $2.03 billion, below our $2.13 billion estimate and slightly below the Street’s $2.05 billion expectation. The Operating Ratio (OR) in the quarter was 58.7%, a quarterly OR record and roughly 80bps better than last year, but ~120bps worse than our estimate and 30bps worse than consensus’ expectation.
- “Quarterly revenues declined 11% to $4.92 billion, below our $5.02 bn estimate and slightly below consensus’ $4.93 billion. By carload type relative to consensus, Premium revenues beat while Industrial, Bulk and ‘Other’ revenues missed.
- “Earlier this week, UNP announced that COO Jim Vena will be transitioning out of his role as COO at the end of the year, with Eric Gehringer succeeding him as executive vice president-Operations, effective Jan. 1, 2021. Vena will remain employed at the company as senior advisor through June 2021. While his tenure at UP was short in terms of years (he joined in January 2019), his impact in implementing the Western rail’s version of Precision Scheduled Railroading cannot be overstated.
- “UP noted on its call that they expect to have a full-year 2020 sub-60 Operating Ratio, and we expect it to even be slightly below 59%. In addition, in 3Q, the Class I posted a record quarterly OR of 58.7%. This compares to a nearly 63% OR in 2018, the full-year prior to Vena’s hiring. He has successfully taken expenses out of the network at a faster rate than revenues have fallen. The rail has also shown significant improvement in other metrics such as train length, which is up ~28% over the past two years. That said, the PSR implementation isn’t complete, which both presents an opportunity for further network redesign and cost cutting, but also makes Vena’s departure at this juncture intriguing.”