Union Pacific Beats 4Q, Revs Up Y/Y

Union Pacific Corporation (UNP - Analyst Report) reported fourth quarter fiscal 2012 adjusted earnings of $2.19 per share, surpassing the Zacks Consensus Estimate of $2.16 as well as the year-ago earnings of $1.99. Better-than-expected earnings came on the back of higher core pricing and efficient network operations despite weaker volumes. For the year 2012, the company reported adjusted earnings of $8.27, up 23.1% year over year.

Revenues rose 3% year over year to $5,250 million in the fourth quarter, but missed the Zacks Consensus Estimate of $5,343 million. Volumes (carloads) registered a dip of 2% year over year due to lower coal and agricultural shipments. Average revenue per car increased 5% year over year.

For full-year 2012, revenues rose 7% year over year to $20,926 million. While volumes dipped marginally by 0.3%, average revenue per car rose 7% on a year-over-year basis.

Operating income leaped 7% year over year to $1,725 million in the fourth quarter. For the full year, operating income was $ 6,745 million, up 18% year over year.

Operating expenses for the quarter inched up 1% year over year to $3,525 million. Higher depreciation expenses (up 10%) and purchased services and materials expenses (up 5%) were primarily responsible for the increase. Operating expenses for the year rose 3% year over year to $14,181 million.

Operating ratio (defined as operating expenses as a percentage of revenue) improved 120 bps year over year to 67.1% in the reported quarter. For 2012, operating ratio saw an improvement of 290 basis points year over year to 67.8%. Further, the company’s customer satisfaction index reached to 93 from 92 in the year ago period.

Segment Details

Agricultural revenues in the fourth quarter were $785 million, down 8% year over year. Business volumes were down 9% year over year and average revenue per car was flat year over year.

Automotive accounted for $466 million revenues, up 14% year over year. Business volumes were up 9% year over year and average revenue per car rose 5% year over year.

Chemical contributed $834 million in revenues, up 15% year over year. Volume was up 14% year over year. Average revenue per car came in flat year over year.

Coal revenues saw a decline of 7% year over year to $990 million, owing to 17% decline in volumes. However, average revenue per car remained positive with 12% growth year over year.

Industrial Products generated revenues of $835 million, up 3% despite flat volumes on a year-over-year basis. Average revenue per car was up 3% year over year.

Intermodal segment revenues were $1,021 million, up 6% year over year. Business volumes were up 2% year over year. Average revenue per car was up 5% year over year.

Other revenues increased 14.3% year over year to $319 million.

Liquidity

Union Pacific exited 2012 with cash and cash equivalents of $1,063 million, down from $1,217 million a year ago. Free cash flows were $1,382 million at the end of the year compared with $1,917 million in 2011.

Long-term debt was $8.8 billion in 2012 versus $8.7 billion in 2011. Adjusted debt-to-capitalization ratio decreased to 39.1% from 40.7% at year-end 2011. Return on invested capital stood at 14.0% in 2012 compared with 12.4% in 2011.

Other Railroad Stocks

Other railroads that have already released their fourth quarter earnings include Norfolk Southern Corp. (NSC - Analyst Report) and Kansas City Southern (KSU - Analyst Report). Both the companies surpassed their Zacks Consensus Estimates. While Norfolk Southern registered a year-over-year decline in its earnings, Kansas registered a substantial growth over the prior-year quarter.

Another stock worth considering within the sector is Genesee & Wyoming Inc. (GWR - Snapshot Report), which holds a Zacks Rank #1 (Strong Buy).

Our Analysis

Union Pacific continues to deliver strong results across most of its business groups including automotive, chemicals and Intermodal. 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, unionized workforce and increased railroad regulation might limit the potential upside for the stock.

Union Pacific currently has a Zacks Rank #4 (Sell).