Union Pacific Corp. (UNP) reported excellent financial results in the second quarter of 2011.
The company improved year over year on several metrics, including operating ratio, business growth, pricing gain and cost control. Solid commodities volume, healthy demand for coal and improved rail efficiency helped Union Pacific to perform fabulously.
Union Pacific’s freight revenues should continue to benefit from strong pricing, reflecting both solid yield improvement and higher fuel surcharges. In the second quarter of 2011, the company performed remarkably well despite facing difficult weather conditions. Quarterly freight revenue grew 16% year over year. Five out of the six business groups of Union Pacific posted volume growth in the last quarter.
At present, U.S. railroads are gaining market share from truckers, who are suffering from huge diesel fuel costs. As the largest railroad operator, Union Pacific is benefiting the most. Management is now more confident about the company’s prospect in the second half of 2011.
In second-quarter 2011, core pricing of Union Pacific improved 4.5% year over year. This resulted in an increase of 13% year over year in average revenue per car. Management remains confident in achieving an operating ratio of 65%-67% by 2015. The Quarterly Consumer Satisfaction Index was 92% compared with 89% in the year-ago quarter. This is the best ever quarterly performance by the company.
Nevertheless, we remain concerned regarding the year-over-year increase in operating ratio and gradually slowing growth rate of business volume. Union Pacific competes with other freight railroad operators in the U.S. such as Kansas City Southern (KSU), CSX Corp. (CSX), and Norfolk Southern Corp. (NSC). We believe if the recent U.S. economic volatility persists for a long time, Union Pacific will be significantly affected. We thus maintain our long-term Neutral recommendation.
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