UP’s ‘True Potential’ Shown in 4Q20 Results (Updated, Cowen)

Written by Marybeth Luczak, Executive Editor
UP’s 2020 capital program totaled $2.8 billion. One of the railroad's projects was the Dec. 29 installation of a new master retarder in Houston's Englewood Yard; work took close to eight hours (pictured).

UP’s 2020 capital program totaled $2.8 billion. One of the railroad's projects was the Dec. 29 installation of a new master retarder in Houston's Englewood Yard; work took close to eight hours (pictured).

Union Pacific (UP) reported Jan. 21 that it earned $1.38 billion, or $2.05 per diluted share, in fourth-quarter 2020—comparable to fourth-quarter 2019’s $1.4 billion, or $2.02 per diluted share. Excluding a previously announced $278 million pre-tax, non-cash impairment charge related to its Brazos yard investment, adjusted fourth-quarter 2020 income was $1.6 billion, or $2.36 per diluted share.

For fourth-quarter 2020, UP operating revenue of $5.1 billion was down 1% vs. the same quarter in 2019. Business volumes, as measured by total revenue carloads, increased 3% compared with 2019; premium volumes increased 5% compared with 2019, while bulk was flat (up just 1%) and industrial declined 7%.

“These outstanding results demonstrate the true potential of our franchise as we leveraged all three profitability drivers simultaneously—volume growth, productivity and pricing,” said Lance Fritz, Chairman, President and CEO of UP, the first Class I out of the gate to report its results. “The women and men of Union Pacific persevered throughout the pandemic to provide our customers with a safe, reliable and consistent service product.”

UP announced its fourth-quarter impairment charge in a Jan. 8, 2021, 8-K filing, noting that “investments made to date [in the Brazos yard] will be used for freight car block swapping activities, rather than proceeding with additional investments required to complete the freight car classification yard. While the company’s long-term growth outlook in the Southern region of its network remains unchanged, the implementation of Unified Plan 2020 [Precision Scheduled Railroading, PSR] has created capacity at existing facilities to effectively handle that growth.”

Among other fourth-quarter 2020 results:

• Freight revenue fell 1% from fourth-quarter 2019, “as volume growth and core pricing gains were more than offset by decreased fuel surcharge revenue and a less favorable business mix,” UP reported.

• The operating ratio was 61.0%. When adjusted for the impairment charge, it hit a record 55.6%, or 410 basis points lower than fourth-quarter 2019, according to the railroad. Lower fuel prices, UP noted, positively impacted the operating ratio by 90 basis points.

• Freight car velocity was 223 daily miles per car, improving 1% compared with fourth-quarter 2019.

• Locomotive productivity was 142 gross ton-miles per horsepower day, a 13% improvement vs. the comparable 2019 quarter.

• Quarterly workforce productivity was 1,032 car miles per employee, an 18% improvement vs. fourth-quarter 2019.

• Average maximum train length was 9,154 feet, a 12% rise over fourth-quarter 2019.

2020 Full-Year Results

UP reported net income of $5.3 billion, or $7.88 per diluted share, for 2020. Adjusted full-year net income—excluding the effects of the $278 million pre-tax, non-cash impairment charge—was $5.6 billion, or $8.19 per diluted share. This compares to $5.9 billion, or $8.38 per diluted share, in 2019.

According to the railroad, total operating revenue was $19.5 billion vs. $21.7 billion in 2019. Operating income was $7.8 billion, a decline from 2019.

Among other highlights:

• Freight revenue was $18.3 billion, falling 10% from 2019. Carloadings were down 7% compared with 2019, as bulk, industrial and premium declined “due to the economic conditions brought on by the COVID-19 pandemic,” UP reported.

• The operating ratio was 59.9%. When adjusted for the impairment charge, UP said, it “is a best ever” 58.5%, 210 basis points lower than 2019. Lower fuel prices positively impacted the operating ratio by 130 basis points, the railroad noted.

• The reportable personal injury rate of 0.90 incidents per 200,000 employee hours was flat compared with full-year 2019, UP said. The FRA-reportable rail equipment incident rate of 3.54 per million train miles improved 17% vs. full-year 2019, it added.

Additionally, UP reported that through continued implementation of PSR principles, it made year-over-year improvements in freight car velocity (6%), average terminal dwell (8%), locomotive productivity (14%), workforce productivity (11%), train length (14%), intermodal car trip plan compliance (6 pt.), and manifest/autos car trip plan compliance (6 pt.). The railroad’s fuel consumption rate, measured in gallons of fuel per thousand gross ton miles, improved 2% in 2020 vs. 2019.

UP’s 2020 capital program totaled $2.8 billion. It also repurchased 22 million shares last year, at an aggregate cost of $3.7 billion.

Lance Fritz, Union Pacific Chairman, President and CEO

2021 Outlook

For 2021, the railroad reported that it anticipates full-year volume growth of 4%-6%; 150-200 basis points of operating ratio improvement; and first-quarter volume growth in the low single digits.

“While the economic outlook for 2021 remains uncertain, we will build off our solid 2020 performance to produce continued strong productivity through operational excellence,” Fritz said. “We expect our enhanced service product will support both solid core pricing gains, while also increasing our share of the freight transportation market. Our confidence in our ability to drive value for all of our stakeholders has never been greater.”

UP’s Financial News Releases page provides more information.

Cowen Insight: ‘Strong Q4, Now Ready for the Rebound’

Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl

“UNP [Union Pacific] finished 2020 on a strong note with a record adjusted OR in 4Q, and improvement expected for both volume and OR in 2021,” reported Cowen and Company analysts Jason H. Seidl (Managing Director and Railway Age Wall Street Contributing Editor), Matt Elkott and Elliot Alper. “With an optimistic economic outlook and management’s commitment to step on the buyback gas pedal, we view the pullback in shares following the 4Q print on Thursday as a buying opportunity. Our PT goes to $218 and we reiterate our Outperform.”

Cowen’s Key Takeaways:

• “UNP’s 4Q adjusted EPS was $2.36, beating the consensus figure of $2.30. The company reported a one-time impairment charge (previously announced) of its Brazos yard investment that affected net income by $209MM or $0.31 to earnings. The adjusted operating ratio in the quarter was 55.6%, 410 bps lower than 4Q19 with lower fuel prices accounting for 90 bps of that move.

• “Quarterly revenues declined by 1% but still modestly beat both the Street and our estimate. By carload type relative to consensus, Bulk beat by 1%, Industrial beat by 3%, Premium beat by 2%, and Other missed by 4%. 4Q freight revenue was driven by a 3% increase in volume, offset by 3.5% fuel surcharge negative impact, and a 25 bp headwind relating to mix/price.

• “In terms of volume outlook for 2021, management expects volume growth in low single digits in Q1, with full year volume growth ranging from 4-6 (we are currently modeling closer to the top end of the range). Expectations for Coal and Energy will face headwinds in 2021, more than offset by growth in all other segments. UNP expects 150-200 bps of OR improvement in 2021.

• “UNP purchased 22MM shares in 2020, including $749MM in the fourth quarter. With Cap Ex plans flat for this year and plenty of cash on its balance sheet, management’s capital allocation plan calls for ‘strong share repurchases.’ We are modeling 25MM shares repurchased by the company in 2021. The company intends for a dividend target payout of 40-45% of earnings in 2021.

• “UNP continues to price above rail cost inflation, which is averaging just above 2%. We believe achieving such goals should be relatively easy this year given our expectations for high single digit intermodal pricing (which accounts for 40% of total traffic and is expected to grow nicely this year). Last month the company announced a new service in Southern California to pop-up intermodal ramp in Minnesota, which should allow UNP to service a new attractive market efficiently. Heading into 2021, UNP continues to execute on its pipeline of projects to drive service and product enhancements across its network.

• “Our 2021 estimates remain intact but our 2022 EPS estimate moves up slightly to $10.90 from $10.80. Maintaining our 20x multiple and 2022 EPS of $10.90, our price target goes to $218 from $216. Shares of UNP were down nearly 5% after releasing earnings as investors appeared to take issue with the company’s cautious approach to 1Q guidance. We believe this is shortsighted and view the pullback as a buying opportunity. Reiterate Outperform.”

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