UP: ‘Strong’ 2Q21 Results Amid Supply Chain Disruptions (Updated, Cowen)

“The Union Pacific team leveraged volume growth, core pricing gains and productivity to produce record quarterly results,” said President and CEO Lance Fritz, noting that those results were achieved “in a challenging environment as our rail network continues to be impacted by supply chain disruptions, particularly in the intermodal space.”

Union Pacific (UP) on July 22 reported second-quarter 2021 results, including freight revenue of $5.132 billion, up 29% from the prior-year period, with a 22% increase in business volumes, as measured by total revenue carloads.

Those business volumes were driven by gains in bulk (+13%), industrial (+15%) and premium (+31%).

Sequentially, second-quarter freight revenue was up 10% vs. first-quarter 2021 ($4.649 billion).

UP’s total operating revenue for second-quarter 2021 came in at $5.504 billion, up 30% from second-quarter 2020.

Net income for the three months ending June 30 was $1.8 billion, or $2.72 per diluted share. That compares with net income of $1.1 billion, or $1.67 per diluted share, for the same period last year. Additionally, operating income of $2.5 billion grew 50% from 2020.

While the operating ratio of 55.1% improved 590 basis points, the Class I railroad reported that higher fuel prices negatively impacted it by 210 basis points.

Among UP’s other second-quarter results:
• Freight car velocity was 213 daily miles per car, a 6% decline from second-quarter 2020.
• Locomotive productivity was 140 gross ton-miles (GTMs) per horsepower day, a 3% improvement over the same period last year.
• Average maximum train length was 9,410 feet, a 9% increase over 2020.
• Fuel consumption rate, as measured in gallons of fuel per thousand GTMs, improved 3% from second-quarter 2020.
• Workforce productivity was 1,060 car miles per employee, a 22% improvement over 2020.

In a network update, UP noted that it has completed seven 15,000-foot sidings and has begun construction on 20-plus additional ones.

“The Union Pacific team leveraged volume growth, core pricing gains and productivity to produce record quarterly results,” President and CEO Lance Fritz said. “Beyond our strong financial performance, we also made progress on our goal to reduce our carbon footprint, which includes a 3% improvement in our fuel consumption rate. Importantly, these strong results were achieved in a challenging environment as our rail network continues to be impacted by supply chain disruptions, particularly in the intermodal space.”

2021 Outlook

Moving into the second half of 2021, UP “will continue working with our customers and the broader supply chain to increase fluidity and efficiently handle the strong demand for freight transportation,” Fritz said.

The railroad reported “stronger” 2021 guidance, noting full-year volume growth of 7% and 200 basis points of operating ratio improvement. It affirmed “pricing gains in excess of inflation dollars; $500 million of productivity; and capital spending < 15% of revenue.”

UP’s Investor Presentation page provides more information.

Cowen Insight: ‘Increasing or Guide Despite Elevated Cost Environment’

“UNP [UP] reported a better than expected EPS as the company continues to increase efficiency measures and productivity, allowing the company to improve its 2021 adj. OR outlook as demand and efficiency trends will likely continue,” reported Cowen and Company analysts Jason H. Seidl (Managing Director and Railway Age Wall Street Contributing Editor), Matt Elkott and Elliot Alper. “Management remains committed to strong capital return to shareholders ($5.4 billion YTD). Increase PT to $239 and reiterate Outperform.”

Cowen’s Key Takeaways:

• “EPS in 2Q of $2.72 came in above our $2.68 estimate, and easily better than the consensus forecast of $2.52. With an OR of 55.1%, UNP was better able to manage its profitability in the quarter compared to some other Class I’s that have reported (Kansas City Southern/KSU; CN/CNI), as net productivity has continued through first-half 2021 ($235 million of net productivity gains in first-half 2021). Fuel in the quarter negatively impacted EPS by $0.04 in the quarter, with real estate gains favorably impacting the bottom line.

• “[C]arloads, on an aggregated basis, were up nearly 22% in the quarter, with strong growth in automotive (off weak 2020 comps), intermodal (e-commerce growth), grain and forest products. Management anticipates 7% volume growth for full-year 2021, with a tapering coal outlook, difficult grain comps in the second half, more than offset by strong volumes in food & fridge, forest products, and intermodal (although tough comps in the second half). Quarter-to-date trends are ~flat y/y according to our carload data, which may see some challenges in the coming weeks due to the Northern California wildfires management discussed on the call (current projections are that damages will be repaired and re-opened by late August). We will continue to assess further implications of the wildfires with our carload data.

• “2021 financial outlook was updated, as UNP now expects adj. OR for 2021 to improve ~200 bps to ~56.5% (previous OR guidance was an improvement of 150 bps-200 bps in 2021), slightly better than our previous forecast. OR guidance assumes a slight tick up in OR in the back half of the year; we expect cost per employee to continue to be under pressure as network congestion and outages will increase overtime compensation on top of wage cost inflation.

• “UNP remains committed to giving back to shareholders, returning $5.4 billion in the first half of 2021. We expect UNP to continue buybacks, as the company is targeting $7 billion in 2021. Its leverage ratio remains ~flat compared to 1Q at 2.8x.

• “We increase our 2021 and 2022 EPS estimates to $10.15 from $10.00 and to $11.40 from $11.35, respectively. Continuing to use our 21x multiple and our new 2022 EPS estimate, our price target goes to $239 from $238. Reiterate Outperform.”