UP 2023: ‘Improved Resource Utilization Drives Strong Service Metrics’ (Updated, TD Cowen Insight)
Written by William C. Vantuono, Editor-in-Chief
Union Pacific photo.
Like much of the industry, Union Pacific’s fourth-quarter and full-year 2023 results reflected growing momentum in the year’s final quarter and into what promises to be a stronger 2024. While full-year earnings per diluted share dropped 7% and net income fell 9% compared to 2022, 4Q23 earnings per diluted share and net income both rose 1%.
UP’s 4Q23 net income of $1.7 billion, or $2.71 per diluted share, improved from 4Q22’s net income of $1.6 billion, or $2.67 per diluted share. Reported net income for full-year 2023 was $6.4 billion, or $10.45 per diluted share, compared to full-year 2022 net income of $7.0 billion, or $11.21 per diluted share.
For 4Q23, “increased volume and core pricing gains offset by lower fuel surcharge revenue led to flat operating revenue,” UP said. “Operating revenue of $6.2 billion was flat driven by increased volume and core pricing gains offset by reduced fuel surcharge revenue and business mix. Revenue carloads were up 3%. The operating ratio was 60.9%, an improvement of 10 basis points. Operating income of $2.4 billion was flat.”
In terms of 4Q23 operating performance, “improved resource utilization drove strong service metrics, a fluid network, and a fourth quarter workforce productivity record,” UP noted. “Quarterly freight car velocity was 217 daily miles per car, a 14% improvement. Locomotive productivity was 140 gross ton-miles (GTMs) per horsepower day, a 14% improvement. Average maximum train length was 9,413 feet, a 2% increase. Workforce productivity improved 4% to 1,051 car-miles per employee. The fuel consumption rate of 1.091, measured in gallons of fuel per thousand GTMs, deteriorated 3%.
For full-year 2023 vs. 2022, “lower fuel surcharge revenue and volume drove reduced operating revenue,” UP said. “Operating revenue of $24.1 billion was down 3%, driven by lower fuel surcharge revenue, business mix and volume declines partially offset by core pricing gains. Revenue carloads declined 1%. The 62.3% reported operating ratio deteriorated 220 basis points, but lower fuel prices positively impacted the OR by 50 basis points. Operating income of $9.1 billion was down 8%.”
For full-year 2023 operating performance, “improving resource availability and utilization resulted in fluid operations to end 2023,” UP said. “Freight car velocity was 204 daily miles per car, a 7% improvement. • Locomotive productivity was 129 GTMs per horsepower day, a 3% increase. Average maximum train length of 9,356 feet was flat. Workforce productivity of 1,000 car-miles per employee declined 3%. The fuel consumption rate of 1.088, measured in gallons of fuel per thousand GTMs, deteriorated 1%. Reportable derailment rates improved, while reportable personal injury rates did not.”
For 2024, UP plans to invest $3.4 billion in capital, compared to 2023’s $3.7 billion, though with “to change to the long-term capital allocation strategy.” The railroad said it would not initiate share repurchases in 1Q24; it repurchased 3.5 million shares in 2023 at an aggregate cost of $712 million. The volume outlook is “muted by international intermodal business loss, lower coal demand, and soft economic conditions,” and expects “pricing dollars in excess of inflation dollars”
“The team continues to execute our multi-year strategy to be the industry’s best in safety, service, and operational excellence,” said UP CEO Jim Vena. “Our fourth quarter results show much of what’s possible at Union Pacific and that we’re on the right path to reaching our goals. Service and operational metrics showed great improvement in the quarter. Those improvements propel us toward a service product that supports growth with our customers. We enter 2024 with strong momentum, recognizing we have plenty of opportunity to improve. We’re excited to show our stakeholders what our great team can accomplish.”
Tempering his comments by saying that he’s “always conservative with forecasts” because the economy and consumer spending are never totally predictable, Vena told Railway Age that UP’s performance in recent weeks, especially the fourth quarter of 2023, “showed what we can do. We delivered a consistently high level of service and recovered well from the winter weather hit. I believe we’re pulling the right levers, putting the right capital in the right places. We think we can grow.”
On UP’s productivity gains, Vena said that, like anything in railroading, “it’s not easy work.” He pointed to empowering decision-making at the local level (switching, yard movements, etc.). He also noted that the railroad’s PTB (Precision Train Builder) tool, developed in house with UP subsidiary PS Technology, involves “true science” that has improved safety. PTB helps create train consists that are balanced in terms of makeup (empties vs. loads, tonnage, etc.) and power (total horsepower, locomotive placement with Distributed Power, etc.), taking right-of-way physical characteristics (grades, curvature, etc.) into account. The resulting reduction in in-train buff and draft forces improves train handling and safety.
Vena concluded his remarks by thanking Union Pacific’s employees “for all the hard work they do, every day.”
TD Cowen Insight: UP “Trying to Find Its Rhythm”
By Wall Street Contributing Editor Jason Seidl
Union Pacific’s 4Q23 beat our forecast and consensus expectations on volume growth and headcount reductions. Weather has kicked off 2024 to a slow start and management remains uncertain about volume growth for the full year despite easy comparisons within intermodal. Cost controls, productivity and margin improvement remain the key focus. Our price target moves to $251 as we roll our model forward and reiterate Outperform.
UNP reported 4Q EPS of $2.71 vs. our $2.48 and Street estimate of $2.58. Better than expected volume growth allowed UNP to hold revenues ~flat y/y. A notable 3% sequential step down in headcount mitigated comp and benefits and drove a 240bps sequential OR improvement to 60.9%, 170bps better than our estimate.
On its earnings call UNP took a cautious view on volumes in 2024. We believe a muted volume environment should mitigate margin improvement initiatives during the year. Coal faces challenges from elevated inventories and favorable competing natural gas prices. Construction-related volumes face tough comps. International intermodal volumes were surprisingly guided down y/y as UNP lost volumes from a large customer at the start of the year.
Downward guidance on intermodal volumes does not assume gains from accelerated freight inflow to the West Coast. Indeed, management highlighted that they are yet to see volumes pick up on the West Coast despite volume growth at Los Angeles/Long Beach. CN suggested the same on its earnings call this week. It is likely that attractive OTR rates are absorbing shifting volumes in our view. If Panama and Suez Canal restrictions persist as we head into an OTR rate recovery (likely in 2H), the intermodal volume picture could move more positive.
With volumes largely uncertain in 2024, the focus on the call was on what UNP could control (to some extent): the cost/margin picture. While avoiding margin guidance, moving pieces on the cost side and inflationary pressure except fuel of +5% are expected for the year. Similar to what we heard from CSX this week, the cost picture may prove to be more sticky over the near term than we previously modeled. Compensation and benefits from labor agreements should also grow 5% y/y. UNP finished the year with a 62.3% OR, worsening ~220bps y/y (slightly better than CSX on a y/y basis) and note that 2018 was the last time the company had an OR north of 62%.
We lower our 2024 EPS estimate to $10.65 from $11.40 due to 1) slow start to the year 2) uncertain volume outlook with no real lever for growth and 3) inflationary costs that are proving sticky in the business. We introduce our 2025 EPS of $12.55 (vs current consensus of $12.69), and using our 20x multiple, our price target moves to $251 from $228.
