Like all North American railroads, Union Pacific has been experiencing volume declines. As a result, the railroad’s financial performance has suffered, for both fourth-quarter and full-year 2015, as UP reported on Jan. 21, 2016.
UP’s 2015 fourth-quarter net income of $1.1 billion, or $1.31 per diluted share, some 6% lower than $1.4 billion, or $1.61 per diluted share, in fourth-quarter 2014. Operating revenue of $5.2 billion was down 15% in the fourth quarter compared 2014. Quarterly freight revenue decreased 16%, as volume declines, lower fuel surcharge revenue, and negative business mix more than offset core pricing gains. Fourth-quarter business volumes, as measured by total revenue carloads, declined 9% compared to 2014. Volumes declined in all of the company’s business groups with the exception of automotive which rose 1%. Chemicals dropped 7%; agricultural products dropped 12%; intermodal dropped 14%; industrial products dropped 23%; and coal dropped 31% in fourth-quarter 2015.
“Total volumes decreased 9% in the quarter, more than offsetting another quarter of solid core pricing gains,” said UP Chairman, President and CEO Lance Fritz. “On the cost side, we continued to adjust resources throughout the quarter and also made solid progress with our productivity initiatives. As a result of these efforts, we achieved a quarterly operating ratio of 63.2%.” Lower fuel prices helped, as the $1.61 per-gallon average quarterly diesel fuel price in fourth quarter 2015 was 39% lower in 2014. Yet, the 63.2% operating ratio was unfavorable by 1.8 points, compared to fourth-quarter 2014. UP’s quarterly train speed, as reported to the Association of American Railroads (AAR), was 27.0 mph, 13% faster than the fourth quarter 2014. It is a well-known fact that, as volume declines, average train speed increases, and average car dwell time decreases. Also, the company repurchased 6.6 million shares in fourth quarter 2015 at an aggregate cost of $586 million.
For full-year 2015, UP reported net income of $4.8 billion or $5.49 per diluted share, vs. $5.2 billion or $5.75 per diluted share in 2014, representing 8% and 5% decreases, respectively. Operating revenue totaled $21.8 billion as compared to $24.0 billion in 2014. Operating income totaled $8.1 billion, an 8% decrease compared to 2014. Freight revenue decreased to $20.4 billion, a 10% decrease. Carloadings were down 6%, with declines in each of the company’s business groups with the exception of automotive.
On the plus side, average diesel fuel prices decreased 38% to $1.84 per gallon in 2015 from $2.97 per gallon in 2014. UP’s operating ratio of 63.1% was a full-year record, improving 0.4 points from the previous record set in 2014. Train speed, as reported to the AAR, was 25.4 mph, 6% faster compared to the full year 2014 (though, as mentioned above, train speed, along with car dwell time is in inverse proportion to traffic volume). UP’s reportable personal injury rate of 0.87 incidents per 200,000 employee-hours was a full year record, improving 11% compared to the full year 2014.
Most significant, UP’s capital program in 2015 totaled $4.3 billion, an increase of approximately $200 million over 2014.
The company repurchased 35.3 million shares in 2015 at an aggregate cost of almost $3.5 billion.
“This past year was a difficult one in many respects, but our team did outstanding work in the face of dramatic declines in volumes, and shifts in our business mix,” Fritz said. “Overall economic conditions, uncertainty in the energy markets, commodity prices, and the strength of the U.S. dollar will continue to have a major impact on our business this year. However, we are well-positioned to efficiently serve customers in existing markets as they rebound. The strength and diversity of the Union Pacific franchise also will provide tremendous opportunities for new business development as both domestic and global markets evolve. When combined with our unrelenting focus on safety, productivity, and service, these opportunities will translate into an excellent experience for our customers and strong value for our shareholders in the years ahead.”
“We remain constructive on UP in the long term but acknowledge that near-term upside may be limited due to stubborn macro headwinds in much of the company’s book of business,” said Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “In second-half 2016, easier volume comparisons and potential improvement in intermodal could drive the stock, but we are forecasting volume and earnings declines for the full year.”
“UP reported 4Q15 EPS of $1.31, 18% below last year and short of our and consensus estimates of $1.34 and $1.42, respectively,” Seidl noted. “The operating income declined 19% year-over-year to $1.91 billion, also missing our and street expectations of $1.92 billion and $2.0 billion, respectively. Revenue fell 15% to $5.2 billion as volume declined 9.0% (all traffic groups except automotive declined), and revenue per carload was down 8.0%, as 6.5% and 4.0% negative impacts from fuel surcharges and mix, respectively, more than offset a 3.5% core price increase (legacy added half a percentage point to pricing). This pricing result was in line with 3Q15, which in turn represented a deceleration from 4.0% pricing in 2Q15. The pricing result in our 4Q15 Rail Shipper Survey was 3.2%, marking a slight 20 basis point sequential decrease, the third consecutive one. UP’s revenue result was just below our and street expectations. The operating ratio (OR) deteriorated by 180 basis points year over year to 63.2% and was a modest 30 basis points better than our assumption, but 170 basis points worse than the implied consensus OR.”
“Consistent with two other Class I’s, UP expressed a good deal of caution regarding 2016,” Seidl said. “Coal, which, at 16% of volumes, is the single largest bulk commodity for the company, should decline again year over year due to low natural gas prices, high coal inventories and low demand for export coal. Unfavorable oil spreads and decreased production should remain a significant headwind for crude-by-rail shipments. Lower crude oil prices should also continue to challenge minerals and metals volume. On the intermodal front, domestic volumes remain solid, but relatively soft retail sales are likely to create headwinds for international intermodal. Automotive and construction products shipments have been bright spots, but UP expressed some caution about the sustainability of strong auto demand.”
“With no more legacy contracts coming up for renewal, and with much of the company’s book of business remaining sluggish, pricing could moderate further, but is unlikely to fall off a cliff,” said Seidl. “Investors should recall that the railroads pushed through compensatory increases even during the great recession. UP has the added benefit of legacy contracts renewed in the past couple of years, which would have a bigger impact if traffic rises in affected commodities, such as coal (not something we are modeling).”