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WIKI ANALYSIS
Union Pacific Corporation (NYSE: UNP) owns the Union Pacific Railroad Company, one of America's leading transportation companies and operator of one of the largest railroads in North America. The Union Pacific railroad stretches from the Mississippi River to the Pacific Ocean and is the only railroad that serves all six significant gateways to Mexico.[1] UNP caters to six commodity groups: agricultural, automotive, chemicals, energy, industrial products, and intermodal shipping. The company has significant pricing power that helped drive total freight revenues up 11% during 2008 and produce a milestone $2.3 billion in net income for the year;[1] from 2004 to 2009, UNP repriced 82% of its contracts, helping it to attain record earnings even as its overall shipping volume decreased 5% during 2008.[1]
Despite a slumping economy, UNP saw revenue growth from all sectors except the automotive industry between 2007 and 2008.[2] The company was able to translate its revenue growth into an earnings increase by hiking prices,[1] temporarily laying off some employees,[3] garaging some of its locomotives and freight cars,[3] and taking advantage of declining oil prices during the last quarter of 2008.[3] Despite a performance that beat analyst estimates by 6.5% during Quarter 4 2008, CEO Jim Young and management have declined to provide specific earnings guidance for 2009 because of unpredictable demand in a volatile economy.[3]
Business Overview
Union Pacific operates the Union Pacific Railroad, a freight railroad linking 23 states in the western two-thirds of the United States.[1] The railroad serves six different sectors, with energy, industrial products, and agricultural shipments accounting for 60% of the company's revenues.[4] UNP's income depends on the volume of freight contracts it sells and the price of those contracts while its expenses primarily consist of labor, fuel costs, and track maintenance.
Business & Financial Metrics
| 2006 | 2007 | 2008 | |
| Total Revenue ($millions) | 15,578[5] | 16,283[6] | 17,970[6] |
| Net Income ($millions) | 1,606[5] | 1,855[6] | 2,338[6] |
| Gross Ton-Miles (GTMs) | 1,072,500[7] | 1,052,319[6] | 1,020,370[6] |
| GTMS per Employee | 21.14[7] | 21.01[6] | 21.15[6] |
| Average Train Speed (Miles per Hour) | 21.4[7] | 21.8[6] | 23.5[6] |
| Average Terminal Dwell Time (Hours) | 27.2[7] | 25.1[6] | 24.9[6] |
| Average Revenue per Car | $1,501[8] | $1,591[8] | $1,848[6] |
In Quarter 4 2008, Union Pacific had a net income of $661 million[3] - up over 25% from $491 million one year prior.[3] Despite a slumping economy throughout the year, the company was able to increase its earnings by furloughing 3,150 workers throughout the year and stowing away 1,200 locomotives and 48,000 railcars.[3] During the fourth quarter specifically, the company saw a 20% increase in energy shipping and a 10% increase in agricultural shipping, soundly offsetting declines in its four other sectors.[3]
Declining oil prices also accounted for reduced expenditures - the company's average cost per gallon of diesel fuel dropped 6% from a year before.[3] By also cutting total fuel consumption by 13%, UNP was able to save 19% on its fuel costs to maintain earnings growth.[3] The company successfully raised its prices during 2008 to bolster revenues and railroad officials believe that contract prices can be increased 5 or 6 percent during 2009.[3]
Despite a global recession that weakened demand during 2Q09--revenue carloads fell by 22% as compared to 2Q08[9]--UNP nonetheless reported net income of $468 million, albeit this was 11.9% lower than in 2Q08.[9] Moreover, operating revenue declined by 27.7% overall, and in particular, freight revenue dropped by 28.2%.[9] UNP was able to maintain operating and net income due to a 29.8% diminution in operating expenses, primarily because of an over 68% decrease in fuel expense.[9] UNP strongly benefited from a precipitous fall in fuel prices, as its average price per gallon of fuel fell from $3.60 to $1.57; however, part of the savings came as a result of a 22% decline in demand, measured by volume, or gross ton miles.[9]
Net income for Union Pacific in 3Q09 fell by 26.5% to $517 million, though the company was able to curtail expenses in a quarter of relatively week demand, as operating expenses fell by about the same amount: 25.5%[10] In particular, falling oil prices led to a 58.9% drop, from $1.135 billion to $466 million, in fuel expense for 3Q09 as compared to 3Q08.[10] The impact of the recession is illustrated through the 15% drop in revenue carloads, with industrial products and automotive shipments falling by 29% and 19%, respectively, despite drops in average revenue per car of 14% for each product group.[10]
Business Segments
Union Pacific only has one reportable operating segment: its railroad segment.[2] This segment operates a railroad with 32,012 route miles that links Pacific Coast and Gulf Coast ports with the Midwest and eastern United States gateways .[2] It also provides access to several key Mexican gateways and imports and exports freight across the Canadian and Mexican borders.[2] Although Union Pacific's rail network is well-integrated across commodity groups, energy and industrial products were the biggest revenue generators for UNP in 2008.[2]
| 2008 Revenue ($millions) | 2007 Revenue ($millions) | YoY Change | Percent of 2008 Freight Revenue | |
| Agricultural | 3,174 | 2,605 | 21.8% | 18.5% |
| Automotive | 1,344 | 1,458 | -7.8% | 7.9% |
| Chemicals | 2,494 | 2,287 | 9.1% | 14.6% |
| Energy | 3,810 | 3,134 | 21.6% | 22.3% |
| Industrial Products | 3,273 | 3,077 | 6.4% | 19.1% |
| Intermodal | 3,023 | 2,925 | 3.4% | 17.7% |
Energy (22% of 2008 Freight Revenue):[4] No sector generated more revenues for Union Pacific than the energy sector in 2008.[4] UNP's energy shipments primarily consist of coal and coke shipments to utilities, factories, and water terminals.[4] Coal from the Southern Powder River Basin in Wyoming[11] is the biggest driver of UNP's energy freight revenue growth.[4]
Industrial Products (19% of 2008 Freight Revenue):[4] This sector includes lumber shipments, steel, construction products, paper, consumer goods, metals, and industrial minerals.[4] Transportation services for government entities and waste companies are also included in the "Industrial Products" tally.[4]
Agricultural (18% of 2008 Freight Revenue):[4] UNP's agricultural shipments include whole grains, commodities produced from these grains, and food and beverage products including fresh and frozen fruits and vegetables, dairy products, and beverages.[4] Union Pacific has exposure to most of the United States' primary grain markets and creates a link between producing areas in the Midwest and West with Pacific Northwest export terminals, Gulf ports, and Mexico.[4]
Intermodal (18% of 2008 Freight Revenue:[4] Intermodal shipments consist of a hodgepodge of container and trailer shipments as well as time-sensitive delivery services for businesses willing to pay a premium.[4] UNP's intermodal business is done with both domestic and international clients.[4]
Chemicals (15% of 2008 Freight Revenue):[4] Union Pacific services chemical-producing areas along the Gulf Coast and in the Rocky Mountain region and two-thirds of UNP's chemical shipments are liquid and dry chemicals, plastics, or liquid petroleum products.[4] The company ships soda ash from Wyoming and California to glass producers all over the country as well as fertilizer from the Gulf Coast, West Coast, and Canada to farmers in the Midwest.[4]
Automotive (8% of 2008 Freight Revenue):[4] UNP is the largest automotive carrier west of the Mississippi River; it acts as the shipper for seven vehicle assembly plants and distributes imported vehicles from six West Coast ports and Houston, ultimately delivering finished cars to 38 automotive distribution centers where they are taken to dealerships by truck.[4] The company also transports automotive parts.[4]
Trends and Forces
UNP's performance is directly tied to prevailing economic conditions
Both national and international economic conditions affect the demand for the commodities that UNP transports; the state of the economy directly affects the amount of goods being shipped and UNP freight orders being placed. For example, a significant change in the U.S. economic climate can affect automobile purchases and hurt UNP's business with General Motors, one of its two biggest customers.[12] Furthermore, international economic shifts directly affect UNP's intermodal segment, which deals with imports and exports and accounted for 18% of the company's revenue in 2008.[4]
Labor constitutes significant expense and risk
Labor is the largest operating expense for UNP and about 86% of UNP's 48,242 employees are part of a railroad union.[4] Maintaining union-level wages, hours, and working conditions resulted in compensation and benefits for employees accounting for 32% of the company's total expenses in 2008.[13] The high percentage of unionized employees also makes UNP especially vulnerable to strikes, work stoppages, or work slowdowns. Furthermore, liabilities and personal injury are a real danger for employees in the railroad industry; personal injury expense totaled $203 million in 2007 but was reduced by $82 million during 2008 because of research conducted by the company guiding it to enhance its injury prevention efforts.[14]
Oil prices influence a large portion of expenses
Oil prices have a significant impact on Union Pacific's expenses - in 2008, the company spent $4.0 billion on fuel (28.6% of its total expenses).[13] UNP uses a fuel surcharge program to offset expenses related to rising oil prices but surcharge rates for any given month are set two months in advance and consequently reflect outdated oil prices;[15] as a result, the fuel surcharge does not always protect UNP from losses related to oil volatility.
| Month | Surcharge on Shipments | On-Highway Diesel Fuel Avg. Price |
|---|---|---|
| December 2008 | 23.5% | $2.449 |
| January | 16.5% | $2.292 |
| February | 12.0% | $2.195 |
Weather has a direct impact on track maintenance costs
Severe weather and natural disasters can delay or disrupt railroad operations and result in revenue loss. Damaged infrastructure resulting from such weather also increases track maintenance costs. In 2008, UNP spent $1.7 billion on track maintenance.[16] Track delays and closings disrupt damaged areas and can easily spread delays and stoppages throughout UNP's entire rail network.
Competition
UNP's main competition comes from other railroads, the long-haul trucking industry, and barge operators. Burlington Northern Santa Fe Corporation is UNP's most significant railroad competitor while the company's competition with non-railroad freight services is difficult to quantify.
- Burlington Northern Santa Fe: UNP's primary competitor primarily operates in the western half of the United States; as a result, Burlington Northern Santa Fe and UNP directly compete for delivery contracts.[17]
- Canadian National Railway Company: Primarily operates in Canada but also has track running through the middle of the United States; competes with UNP for deliveries less frequently than Burlington Northern Santa Fe.[18]
- Norfolk Southern: Operates in the eastern half of the United States and directly competes with UNP on occasion.[19]
| Company | Revenue ($millions) | Net Income ($millions) | Operating Margin | Miles of Track Owned | Number of Locomotives | Number of Freight Cars | Average Revenue per Car |
|---|---|---|---|---|---|---|---|
| Union Pacific | 17,970[20] | 2,338[20] | 22.7%[20] | 32,012[2] | 8,448[21] | 90,005[21] | $1,848[8] |
| Burlington Northern Santa Fe | 18,018[22] | 2,115[22] | 21.7%[22] | 32,000[23] | 6,510[23] | 82,555[23] | $1,751[21] |
| Canadian National Railway | 8,482[24] | 1,895[24] | 34.1%[24] | 20,421[25] | Unavailable | Unavailable | Unavailable |
| Norfolk Southern | 10,661[26] | 1,716[26] | 16.1%[26] | 20,832[26] | 3,976[26] | 94,660[26] | $1,126[26] |
References
- ↑ 1.0 1.1 1.2 1.3 1.4 UNP 2008 10-K pg. 5
- ↑ 2.0 2.1 2.2 2.3 2.4 2.5 2.6 UNP 2008 10-K pg. 59
- ↑ 3.00 3.01 3.02 3.03 3.04 3.05 3.06 3.07 3.08 3.09 3.10 Josh Funk (January 22, 2009). Union Pacific railroad's 4Q profit up 35 pct. Associated Press.
- ↑ 4.00 4.01 4.02 4.03 4.04 4.05 4.06 4.07 4.08 4.09 4.10 4.11 4.12 4.13 4.14 4.15 4.16 4.17 4.18 4.19 4.20 4.21 4.22 UNP 2008 10-K pg. 6
- ↑ 5.0 5.1 UNP 2008 10-K pg. 55
- ↑ 6.00 6.01 6.02 6.03 6.04 6.05 6.06 6.07 6.08 6.09 6.10 6.11 6.12 Press Release (January 22, 2009). Union Pacific Reports Fourth Quarter Earnings Growth Driven by Productivity and Lower Energy Costs. Yahoo! Finance.
- ↑ 7.0 7.1 7.2 7.3 UNP 2008 10-K pg. 35
- ↑ 8.0 8.1 8.2 UNP 2008 10-K pg. 29
- ↑ 9.0 9.1 9.2 9.3 9.4 UNP 2Q09 10-Q
- ↑ 10.0 10.1 10.2 UNP 2009 3Q 10-Q
- ↑ Business Wire (January 15, 2007). Union Pacific Boosts SPRB Coal Shipments to Nation's Utilities During 2006 - Setting New One Year Record. BNET.
- ↑ Union Pacific Corporation: Company Overview. WetFeet.
- ↑ 13.0 13.1 13.2 UNP 2008 10-K pg. 32
- ↑ UNP 2008 10-K pg. 34
- ↑ 15.0 15.1 Carload Rate Based Standard HDF Fuel Surcharge. Union Pacific.
- ↑ UNP 2008 10-K pg. 38
- ↑ Profile: Burlington Northern Santa Fe Corp.. Yahoo! Finance.
- ↑ Profile: Canadian National Railway Company. Yahoo! Finance.
- ↑ Norfolk Southern Corporate Profile. Norfolk Southern.
- ↑ 20.0 20.1 20.2 UNP 2008 10-K pg. 24
- ↑ 21.0 21.1 21.2 BNI 2008 10-K pg. 16
- ↑ 22.0 22.1 22.2 BNI 2008 10-K pg. 14
- ↑ 23.0 23.1 23.2 BNI 2008 10-K pg. 6
- ↑ 24.0 24.1 24.2 CNI 2008 Earnings Release pg. 4
- ↑ Quick Facts & Figures. CN.
- ↑ 26.0 26.1 26.2 26.3 26.4 26.5 26.6 NSC 2008 10-K
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