Union Pacific Corporation (UNP - Analyst Report) reported third quarter fiscal 2012 adjusted earnings of $2.19 per share, surpassing the Zacks Consensus Estimate by a penny and the year-ago earnings of $1.85. Despite weaker coal volumes and subdued metal market, the company’s earnings mainly benefited from pricing gains, operational efficiency and growth across other product lines.

Revenues of $5,343 million came below the Zacks Consensus Estimate of $5,384 million but grew 5% year over year on higher freight revenues based on core pricing gains of 5%. Higher volumes from Chemicals, Automotive and Intermodal compensated for declines in Coal and Agricultural and volumes.

On a year-over-year basis, freight revenues for Chemicals, Automotive, Intermodal, Industrial Products increased 17%, 15%, 8% and 2%, respectively. Coal and Agricultural revenues were down 5% and 4%, respectively. Total volumes remained flat year over year at 2.3 million units and average revenue per car increased 4% year over year.

Operating income leaped 13% year over year to $1,786 million in the third quarter. Operating expenses inched up 1% year over year to $3,557 million. Operating ratio (defined as operating expenses as a percentage of revenue) improved 250 bps year over year to 66.6% in the reported quarter.

Liquidity

Union Pacific exited the third quarter of 2012 with cash and cash equivalents of $1,130 million, down from $1,647 million in the same quarter a year ago. Free cash flow was $640 million at the end of the third quarter versus $1,486 million in the year-ago period.

Long-term debt stood at $8.77 billion in the third quarter from $8.69 billion in December 31, 2011. Adjusted debt-to-capitalization ratio decreased to 40.2% from 40.7% at year-end 2011. Further, the company repurchased 3.1 million shares worth $378 million 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 alongside strong productivity and cost-control measures.

However, the 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 its major rivals like Norfolk Southern Corp. (NSC - Analyst Report), CSX Corporation (CSX - Analyst Report) and Kansas City Southern (KSU - Analyst Report), unionized workforce and increased railroad regulation might limit the potential upside for the stock.

We have a Zacks #3 Rank (short-term Hold rating) on Union Pacific. We also reiterate our long-term Neutral recommendation on the stock.