(UNP) Union Pacific Exits 2011 on a High

Before the opening bell, the U.S. railroad giant Union Pacific Corp. (UNP) reported its fourth quarter fiscal 2011 adjusted earnings of $1.99 per share, surpassing the Zacks Consensus Estimate of $1.81 as well as the year-ago earnings of $1.56. Better-than-expected earnings were on the back of increased prices and more cargo hauling.

Fiscal 2011 adjusted earnings shot up 22% to $6.72 from a year ago, representing the most profitable year in the company’s history. The U.S. railroads are gaining market share from truckers, who are suffering from the significant rise in diesel fuel costs.

Revenue climbed 16% year over year to a record $5.108 billion in the fourth quarter, and breezed past the Zacks Consensus Estimate of $5.051 billion on volume growth. Volumes (carloads) grew 3% year over year in the reported quarter.

The year-over year growth was largely driven by Automotive (up 10%), Chemicals (up 10%), Energy (up 8%) and Industrial Products (up 7%), partially offset by weak Agriculture (down 5%) and Intermodal (down 3%) volumes. Average revenue per car increased 13% year over year in the fourth quarter.

For the full fiscal year, revenue was $19.557 billion, up 15% year over year. Revenue ton-miles, which measure the relative weight and distance of rail freight transported by Union Pacific, rose 5% year over year in both the fourth quarter and fiscal 2011.

Operating expenses increased 13% and 15% year over year in the fourth quarter and fiscal year, respectively. Higher fuel expenses of respective 36% and 46% in the reported quarter and fiscal 2011 were responsible for the increase.

Operating ratio (defined as operating expenses as a percentage of revenue) improved 190 bps year over year to 68.3% in the reported quarter on the back of increased fuel cost recoveries, pricing gains, volume growth and improved operating efficiency. Operating ratio slightly deteriorated by 10 bps year over year to 70.7% in fiscal 2011.

Operating income leaped 23% and 15% year over year in the fourth quarter and full-year 2011, respectively.

Liquidity

Union Pacific exited fiscal 2011 with cash and cash equivalents of $1.217 billion, up from $1.086 billion in the prior year. Long-term debt inched down to $8.7 billion from $9 billion in 2010. Adjusted debt-to-capitalization ratio decreased to 40.7% from 42.5% in the last year.

The company generated free cash flow of $1.9 billion compared with $1.4 billion in 2010 and invested $3.18 billion in fiscal 2011, up 28% from the prior year. Further, the company repurchased $381 million and $1.4 billion of shares in the reported quarter and the full 2011, respectively.

Our Take

Although management expects slow and steady economic growth in 2012, we believe Union Pacific’s revenues will continue to benefit from strong pricing, reflecting both solid yield improvement and higher fuel surcharges. Additionally, healthy liquidity position coupled with solid future business visibility encourages the company to raise dividends and share buybacks, which inspires our optimism.

Nevertheless, we remain on the sidelines for the long term due to the company’s capital-intensive nature, stiff competition from major rivals like Norfolk Southern Corp. (NSC), CSX Corporation (CSX) and Kansas City Southern (KSU), unionized workforce as well as increased railroad regulation.

We are currently maintaining our long-term Neutral recommendation on the stock.  For the short term (1-3 months), the stock holds a Zacks #2 (Buy) Rank.

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