Morningstar | Union Pacific Generates Record Earnings per Share Despite Tunnel Collapse and Fluidity Challenges
Union Pacific generated record EPS despite some continuing network fluidity problems, a tunnel outage, and train crew shortages in some regions. The second-quarter operating ratio degraded 110 basis points to 63.0%, with higher fuel surcharges playing a material role. Union Pacific improved core price 2%, or 3% excluding coal and international intermodal. This is lower than we expect, but we maintain our wide moat rating and expect to increase our fair value estimate as we update our model for volume stronger than previously projected.The rail is focused on better service, and this challenges OR improvement because it requires greater manpower and locomotives. The Oregon tunnel outage drew more of both resources, plus additional fuel to bypass the blocked route. While other rails, like CSX, boast of reduced employee count and smaller fleets, it has moved in the opposite direction to recover velocity, dwell, and prompt delivery.
Total volume increased 4% from the year-ago quarter, with 6% expansion in international and domestic intermodal offsetting 1% declines in agriculture and energy. Within energy, coal declined 10% and smaller segments improved (sand up 24%, petroleum/LPG/renewables up 19%). Coal decreased on a lost contract and coal plant retirements, in addition to pressure from cheap natural gas. Sand seems poised to weaken given June was the first month this year in which frac sand shipments into the Permian were lower than a year ago.
Management expects to grow full-year volume at low- to mid-single-digit rates, and to improve the 2018 OR from the 62.8% 2017 adjusted OR. Once the network is running well, we think Union Pacific will extract labor and locomotives. We model an OR about flat to the prior-year adjusted value, but the timing of straightening out congestion is uncertain and could last into winter, for demand continues to roll in many segments, especially intermodal given the constrained supply and high prices in the trucking market.
Union Pacific, through its operating subsidiary, Union Pacific Railroad Company, is a Class I railroad operating in the United States. The company's network included route miles, linking Pacific Coast and Gulf Coast ports with the Midwest and eastern United States. gateways and providing several corridors to key Mexican gateways. The company serves the western two-thirds of the country and maintains coordinated schedules with other rail carriers for the handling of freight to and from the Atlantic Coast, the Pacific Coast, the Southeast, the Southwest, Canada, and Mexico. The company's business mix includes agricultural products, energy, industrial, and premium.
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