Morningstar | UP Delivers Excellent Improvements, New Chief Operating Officer Ready to Polish Operating Plan
We maintain our wide moat rating following fourth-quarter results and expect any increase to our fair value estimate will be minor. The major take away is that UP is fast-tracking its precision scheduled railroading roll out, enhanced by adding significant leadership. The environment is a healthy one in which to improve operations. UP grew fourth-quarter carloads by 3% despite declines in agriculture and coal, expanded average revenue per carload 2.3% and core price by 2.5%, and increased revenue 6%. The rail improved its normalized fourth-quarter operating ratio by one percentage point to 61.6%, a superb starting point for further deployment of an improved operating system.We questioned UP’s dedication to PSR given management discussed implementation but installed no PSR experts in its high ranks. Well, UP escalated its commitment to PSR about a week ago by appointing as chief operating officer Jim Vena, who we knew from his operations leadership (including as COO) at PSR pioneer, Canadian National. Indeed, given Vena honed his operating chops for years under PSR visionary Hunter Harrison, in our view few would have greater experience putting this operating plan in practice.
As the rail rolled out PSR in two of three geographic stages, UP improved terminal dwell and car velocity, reduced daily crew starts, improved trip plan compliance, stored 1,200 locomotives since August, and reduced car inventory by 16,000. In 2019, management expects low-single-digit volume expansion, pricing improvement above inflation, and OR improvement to below 61%. 2020 guidance improved from 60% to a sub-60% OR, and longer term, 55%; we model 59% in 2020 and 57% in 2022. Adding Vena boosts our confidence this will be realized, and UP’s OR is already far superior to where other recent PSR success stories began, but this is a much larger railroad than prior PSR implementations. Near term, we would not be surprised to see material adjustments in headcount and yard count or structure.
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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