Union Pacific Beats Bottom Line

Union Pacific Corporation ( UNP - Analyst Report ) reported second quarter 2012 adjusted earnings of $2.10 per share, surpassing the Zacks Consensus Estimate of $1.96 as well as the year-ago earnings of $1.59. Better-than-expected earnings came on the back of increased cargo hauling despite weaker coal volumes.

Revenues of $5,221 million came below the Zacks Consensus Estimate of $5,236 million but grew 7% year over year from $4,858 million on higher revenues through pricing gains and improved fuel surcharges. Volume growth from Automotive, Chemicals, Industrial Products and Intermodal also aided revenue growth, compensating for the lackluster performance by Coal (and formerly know as Energy) and Agricultural.

On a year-over-year basis, freight revenues for Automotive, Industrial Products, Chemicals, Intermodal and Agriculture increased 25%, 14%, 13%, 10%, and 1%, respectively. Coal revenues were down 9%. Total volumes remain flat year over year at 2.2 million units and average revenue per car increased 6% year over year.

Operating income leaped 24% year over year to $1,724 million in the second quarter.

Operating expenses inched up 1% year over year to $3,497 million. Operating ratio (defined as operating expenses as a percentage of revenue) improved 430 bps year over year to 67% in the reported quarter.

Liquidity

Union Pacific exited the second quarter of 2012 with cash and cash equivalents of $1,201 million, up from $ 1,055 million in the same quarter a year ago. Free cash flow was $319 million at the end of the second quarter versus $900 million in the year ago period.

Long-term debt edged down to $8.6 billion in the second quarter from $8.7 billion in December 31, 2011. Adjusted debt-to-capitalization ratio decreased to 40.6% from 40.7% at year-end 2011. Further, the company repurchased $3.8 million shares in the reported quarter.

Our Analysis

Union Pacific continues to deliver strong results across most of its business groups including automotive, chemicals, Intermodal and industrial products, driven by the ongoing productive and cost-control measures.

However, near-term growth for Union Pacific is expected to be tempered by lower coal and agriculture volumes that will likely weigh on top-line growth going forward. Further, stiff competition from major rivals like Norfolk Southern Corp. ( NSC - Analyst Report ) , CSX Corporation ( CSX - Analyst Report ) and Kansas City Southern ( KSU - Analyst Report ) , unionized workforce, steeply rising fuel prices, increased railroad regulation as well as high barriers to entry might limit the potential upside for the stock.

We have a Zacks #2 Rank (short-term Buy recommendation) on Union Pacific. We also reiterate our long-term Neutral rating on the stock.