The U.S. railroad giant Union Pacific Corp. (UNP) reported mixed results for the first quarter of 2011. Quarterly net income was $ 639 million or $ 1.29 per share compared with a net income of $ 516 million or $ 1.01 per share in the year-ago quarter. However, first-quarter 2011 EPS of $ 1.29 was below the Zacks Consensus Estimate of $ 1.31. This was primarily attributable to 33% rise in diesel fuel prices year over year.
Total operating revenue, in the first quarter of 2011, was $ 4,490 million, up 13% year over year and better than the Zacks Consensus Estimate of $ 4,400 million. Within this, total Freight revenue was $ 4,248 million, up 13% year over year. Quarterly Freight revenue of all the six business groups increased in the same quarter.
Union Pacific fumbles with respect to two crucial operating metrics in the reported quarter. Firstly, quarterly operating ratio (operating expenses as a percentage of total revenue) was 74.7%. Although it was better than the year-ago quarter of 75.1%, it dropped significantly from the previous quarter level of 70.2%. In fact for the straight second quarter, operating ratio remains above-70 level.
Secondly, quarterly business volume (measured by total revenue carloads) was 2.189 million, up 5% year over year. For the fourth consecutive quarters, all the six business groups of Union Pacific posted volume growth in the same quarter. However, the growth rate was significantly below the fourth quarter, third quarter and second quarter 2010 growth rate of 9%, 14% and 18%, respectively. In fact for the third quarter in a row, business volume growth rate of Union Pacific is declining.
Quarterly Consumer Satisfaction Index was a record-high of 91% compared with 87% in the year-ago quarter. Operating expenses in the first quarter of 2011 were $ 3,353 million, up 13% year over year. Quarterly operating income was $ 1,137 million, up 15% year over year. In the reported quarter, average revenue per rail car was $ 1,961, up 8% year over year. During the reported quarter, the company repurchased approximately 2.6 million of its own shares for a consideration of around $ 248 million.
During the first quarter of 2011, Union Pacific generated $ 1,294 million of cash from operations compared with $ 656 million in the year-ago period. Free cash flow during the reported quarter was $ 692 million compared with $ 195 million in the year-ago period.
At the end of the first quarter of 2011, Union Pacific had $ 1,248 million of cash and marketable securities on its balance sheet compared with $ 1,086 million at the end of fiscal 2010. Total debt, at the end of the same quarter, was $ 9,196 million compared with $ 9,242 million at the end of fiscal 2010. Debt-to-capitalization ratio at the end of the first quarter of 2011 was 0.33 compared with 0.34 at the end of fiscal 2010.
Segment Wise Revenue
Quarterly total Freight revenue was $ 4,248 million, up 13% year over year. Within this segment, Agricultural revenue was $ 807 million, up 11% year over year. Automotive revenue was $ 342 million, up 12% year over year. Chemicals revenue was $ 664 million, up 13% year over year. Energy revenue was $ 952 million, up 13% year over year. Industrial Products revenue was $ 690 million, up 15% year over year. Intermodal revenue was $ 793 million, up 15% year over year. Quarterly Other revenue was $ 242 million, up 15% year over year.
Our Recommendation
The U.S. freight railroad industry is witnessing gradual improvement since early 2010. As the U.S. economy continues to grow, demand for carriage also becomes robust and the momentum is expected to sustain in the long-run. We maintain our long-term Neutral recommendation on Union Pacific. Currently, it holds a short-term Zacks #3 Rank (Hold) on the stock. This was mainly due to Union Pacific’s current valuation, which moved up by nearly 46% in the last one year and provides limited above market opportunity in the near term. Union Pacific competes with other freight railroad operators in the U.S. such as KansasCity Southern (KSU), CSX Corp. (CSX), and Norfolk Southern Corp. (NSC).
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