UP Expecting ‘Solid’ Financial Finish for 2021 (UPDATED)

Union Pacific (UP) reported third-quarter 2021 operating revenues of $5.566 billion, up 13% from the 2020 period and up 1% from 2019, as part of its Oct. 21 earnings announcement.

Business volumes for the three months ending Sept. 30, 2021, as measured by total revenue carloads, were flat compared with last year—with bulk up 4%, industrial up 14% and premium down 9%. But UP said it expects volume growth of 5% for full-year 2021.

The Class I railroad’s 56.3% operating ratio for third-quarter 2021 improved by 240 basis points from the 2020 period’s 58.7%. UP noted that “higher fuel prices negatively impacted the operating ratio by 140 basis points.” In comparison, its operating ratio for third-quarter 2019 was 59.5%. UP said it anticipates an “operating ratio improvement of +/- 175 basis points” for full-year 2021.

Third-quarter net income was $1.673 billion (or $2.57 per diluted share), a 23% boost from the same quarter in 2020 ($1.363 billion, or $2.01 per diluted share) and an 8% increase from 2019 ($1.555 billion, or $2.22 per diluted share).

Operating income for third-quarter 2021 came in at $2.432 billion, up 20% from 2020 and up 9% from 2019. The railroad said it repurchased 8.6 million shares in third-quarter 2021 at an aggregate cost of $1.8 billion.

On the network operations side, UP reported that wildfires and other weather events were reflected in its quarterly freight car velocity of 195 daily miles per car, a 13% decline from third-quarter 2020. Quarterly locomotive productivity was 127 gross ton-miles (GTMs) per horsepower day, an 8% decline from last year. Quarterly workforce productivity was 1,044 car miles per employee, a 5% improvement, according to the railroad. In addition, average maximum train length increased 4% to 9,359 feet, and the fuel consumption rate, measured in gallons of fuel per thousand GTMs, improved 1%.

Looking ahead, UP said it anticipated a “solid finish” for 2021. Among its expectations:
• “Productivity of $350 million.
• “Pricing gains in excess of inflation dollars.
• “Capital spending < 15% of revenue.”

“The Union Pacific team successfully navigated global supply chain disruptions, a major bridge outage and additional weather events to produce strong quarterly revenue growth and financial results,” Chairman, President and CEO Lance Fritz said. “In the quarter, the team delivered solid core pricing gains, leveraged business development to produce a positive business mix, and generated productivity to offset flat volume. We also set a quarterly record for fuel consumption rate as we continue to make strides toward our goal to reduce our absolute greenhouse gas emissions. As we close out 2021, we are committed to improving our safety performance and service product to support our customers and the broader supply chain to handle the strong demand for freight transportation.”

The UP Investors Website provides more information on third-quarter 2021 financial results.

Cowen Insight

“UP’s 3Q came in above expectations with an impressive OR beat despite a challenging cost and volume backdrop,” reported Cowen and Company analysts Jason H. Seidl (Managing Director and Railway Age Wall Street Contributing Editor), Matt Elkott and Elliot Alper. “The global supply chain continues to be disrupted with volumes now expected to grow ~5% for the year. Pricing appears to be headed higher, and some operational issues seem to be improving. We moderately increase our PT and reiterate an Outperform rating.”

Key Cowen takeaways:

“Adjusted EPS of $2.57 came in above our $2.40 forecast and the consensus forecast of $2.49. Adjusted OR in the quarter improved 240bps to 56.3%, beating our estimate. Operating revenue grew 13% despite flat volumes, as the strong demand environment allowed for pricing to exceed rising inflation.

“Coal and renewables grew 9% in the quarter as customers switched to domestic coal contracts as a result of higher natural gas prices. Grain and grain products decreased 1% due to a lower grain harvest. Fertilizer increased 10% driven by strong agricultural demand. Forest product volumes increased 15% y/y but was down sequentially due to the impacts of the Northern California fires, that attributed to $0.05 to the bottom line. Autos segment took a hit at down 18% y/y due to the ongoing chip shortage we are seeing across the sector. As we look at our carloading data QTD, volumes appear to be down 3.5%, with continued pressure on both the autos and intermodal segments.

“Intermodal volume suffered in the quarter, and management anticipates this will continue through the remainder of the year, as limited truck capacity and inventory restocking continue to keep capacity tight. International volumes will continue to be constrained due to the congestion on the West Coast ports we have seen, although management noted that additional resources have been added (due to the Biden Administration’s efforts) that position UP to move more rail containers and handle increased volume. UP cited it has reduced rail container dwell at the ports back to normal levels.

“UP now expects 5% volume growth this year, and ~175bps of OR improvement, which is still in the guidance range management laid out in January. We believe the carload adjustment to be well understood by the market, and the 175bp OR improvement on an annual basis is encouraging, particularly given the current environment (and as other rails, KCS, CP revised/retracted guidance).

“Management spoke to some large macro-trends in terms of the supply chain, which boils down (currently) to putting people in jobs to increase capacity, particularly on the ports. On the other side of this, UP called out some strong indicators (cash deposits for consumers) that bode well for the goods economy in which UP participates; 2022 looks like a strong environment.”