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Union Pacific Corporation (UNP - Analyst Report) reported third quarter 2013 adjusted earnings of $2.48 per share, surpassing the Zacks Consensus Estimate of $2.47 and year-ago earnings of $2.19. The increase was aided by higher pricing and an improvement in operating ratio, which more than offset flat volumes.

Revenues rose 4.3% year over year to $5,573 million in the third quarter but missed the Zacks Consensus Estimate of $5,613 million. Volumes (carloads) remained flat with the year-ago quarter due to lower Agricultural and Coal shipments. Average revenue per car increased 4.7% year over year.

Operating income rose 9.9% year over year to $1,962 million in the third quarter. Operating expenses increased 1.5% year over year to $3,611 million.

Operating ratio (defined as operating expenses as a percentage of revenue) improved 180 basis points year over year to 64.8%. However, the company’s customer satisfaction index declined 1 point to 93.

Segment Details

Agricultural revenues in the third quarter were $771 million, down 1.5% year over year. Business volumes were also down by 3.7% year over year and average revenue per car increased 2.3% year over year.

Automotive accounted for $512 million of total revenue, up 17.4% year over year. Business volumes were up 7.7% year over year and average revenue per car rose 8.8% year over year.

Chemical contributed $883 million in revenues, up 5% year over year. Volumes were up 2.5% year over year. Average revenue per car rose 2.3% year over year.

Coal revenues saw growth of 2.3% year over year to $1,082 million, while volumes declined 6.6% year over year. Average revenue per car remained positive with 9.5% year-over-year growth.

Industrial Products generated revenues of $975 million, up 10.9% on 8.7% volume growth on a year-over-year basis. Average revenue per car was up 2.2% year over year.

Intermodal segment revenues were $1,027 million, up by a mere 0.5% year over year. Business volumes were down 1.0% year over year. However, average revenue per car was up 1.6% year over year.

Other revenues remained flat year over year at $323 million.

Liquidity

Union Pacific exited the third quarter with cash and cash equivalents of $1,366 million, up from $1,063 million in the year-ago quarter. Free cash flows were $1,317 million at the end of the third quarter compared with $640 million in the corresponding prior-year quarter.

Long-term debt was $8.76 billion in the third quarter versus $8.80 billion in 2012. Adjusted debt-to-capitalization ratio decreased to 38.5% from 39.1% at year-end 2012.

Share Repurchase

The company repurchased 3.7 million shares at an aggregate cost of $575 million during the reported quarter.

Our Analysis

Union Pacific expects to increase investor value and satisfy customers by concentrating on key areas like pricing, new business avenues and network efficiency improvement through enhanced safety, reliability and productivity. Nevertheless, sluggish domestic economic growth is likely to hurt the company’s performance going forward.

Weakness in the agricultural market owing to less corn crop will affect the company’s segment results, while loss of a customer contract early this year will continue to hurt coal volumes. Additionally, stringent regulations, rising expenditures, competitive threats and exposure to global uncertainties pose threats to the company’s results.

Union Pacific, which operates with the likes of CSX Corp. (CSX - Analyst Report), Kansas City Southern (KSU - Analyst Report) and Canadian Pacific Railway Ltd (CP - Analyst Report), currently has a Zacks Rank #4 (Sell).

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