(UNP) Union Pacific Reports Excellent Second Quarter

U.S. railroad giant Union Pacific Corp. (UNP) reported second quarter net income at a record-high of $785 million or $1.59 per share, compared with $711 million or $1.40 in the year-ago quarter.

EPS also beat the Zacks Consensus Estimate by a penny.

Total operating revenue was $4,858 million, up 16% year over year and better than the Zacks Consensus Estimate of $4,727 million.

Total Freight revenue was $4,595 million, up 16% year over year. Quarterly Freight revenue of all the six business groups increased in the reported quarter.

Quarterly operating ratio (operating expenses as a percentage of total revenue) was 71.3%. Although it was worse than the year-ago quarter of 69.4%, it improved significantly from the previous quarter’s 74.7%. The year-over-year decline is mainly attributable to higher fuel prices, which were up 44%. Quarterly business volume (measured by total revenue carloads) was 2.247 million, up 3% year over year. Five out of six business groups of Union Pacific posted volume growth in the previous quarter. The only exception was the Intermodal segment.

The quarterly Consumer Satisfaction Index was a record-high of 92%, compared with 89% in the year-ago quarter. Operating expenses in the second quarter of 2011 were $3,466 million, up 19% year over year. Quarterly operating income was $1,392 million, up 9% year over year.

In the reported quarter, average revenue per rail car was $2,045, up 13% year over year. Union Pacific repurchased around 3.6 million of its own shares for a total consideration of approximately $360 million.

During the first half of 2011, Union Pacific generated $2,640 million of cash from operations compared with $1,695 million in the year-ago period. Free cash flow during the reported period was $1,313 million compared with $639 million.

At the end of the second quarter of 2011, Union Pacific had $1,055 million of cash and marketable securities on its balance sheet, compared with $1,086 million at the end of fiscal 2010. Total debt at the end of the reported quarter was $8,938 million, compared with $9,242 million at the end of fiscal 2010. The debt-to-capitalization ratio at the end of the second quarter of 2011 was 0.32, compared with 0.34 at the end of fiscal 2010.

Segment Revenue

Agricultural revenue was $849 million, up 22% year over year. Automotive revenue was up 14% to $381 million.  Chemicals revenue was $703 million, up 19%.  Energy revenue was $950 million, up 14% year over year.  Industrial Products revenue was up 16% to $803 million. Intermodal revenue was $909 million, up 13% year over year. Quarterly Other revenue was up 16% to $263 million..

Our Recommendation

The U.S. freight railroad industry is witnessing gradual improvement since early 2010. As the U.S. economy continues to grow, demand for carriage also becomes robust and the momentum is expected to sustain in the long-run. We maintain our long term Neutral recommendation on Union Pacific.

Currently, it holds a short-term Zacks #3 Rank (Hold). This was mainly due to Union Pacific’s current valuation, which moved up by over 46% in the last year and provides limited above market opportunity in the near term. 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).

CSX CORP (CSX): Free Stock Analysis Report

KANSAS CITY SOU (KSU): Free Stock Analysis Report

NORFOLK SOUTHRN (NSC): Free Stock Analysis Report

UNION PAC CORP (UNP): Free Stock Analysis Report

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