The Global Demographic Tailwind

[DewDiligence]

UNP 2Q09 Profit falls 12% But Beats Expectations

[UNP is the other of the two major US railroads operating west of Chicago. The rationale for investing is exactly the same as for BNI.]

http://finance.yahoo.com/news/UP-2Q-profit-falls-12-pct-but-apf-50871121.html?x=0&.v=8

›By Josh Funk
Thursday July 23, 2009, 6:19 pm EDT

OMAHA, Neb. (AP) -- Union Pacific Corp. reported a 12 percent drop in its second-quarter net income Thursday as shipping demand remained weak, but the railroad beat expectations by keeping expenses 30 percent lower and selling some land in Colorado.

The Omaha-based railroad reported $468 million, or 92 cents per share, net income in the quarter that ended June 30. That's down from $531 million, or $1.02 per share, a year ago. The company's earnings include a land sale that added $72 million net income, or 14 cents per share.

Operating revenue fell 28 percent to $3.3 billion.

Thomson Reuters said the analysts it surveyed expected Union Pacific to report earnings per share of 76 cents on $3.51 billion revenue. Analyst estimates typically exclude one-time items.

Union Pacific reported sharply lower costs in the quarter, with fuel costs decreasing the most, to $370 million from $1.2 billion.

Union Pacific hasn't offered a prediction for 2009 earnings because of the uncertain economy. Chairman and CEO Jim Young said Thursday that demand may have leveled off because the railroad has been shipping an average of 140,000 to 150,000 carloads a week for several months. But Young said there's not much reason to be optimistic yet.

"I just don't see anything out there that says you're going to jump back to a strong economy here in the next six months," Young said in an interview. "We've got a long ways to go before you can declare the recession's over."

Union Pacific's results are watched closely, because railroads are considered gauges of the nation's economic health. Railroads carry cars, chemicals, crops, containers of imported goods and lumber across the nation, so railroad profits are tied to the health of those industries.

Young said the economy has a long way to go until he feels good about it, and the railroad hasn't yet seen the federal stimulus package boost the need for construction materials much.

"I think most people were maybe overly optimistic on its effect," Young said during a conference call. "What we see with some of our local groups we work with, most of them aren't going to see real dollars spent until the later part of the year."

Union Pacific reported a 22 percent drop in the number of carloads it carried during the second quarter, and freight revenues were down across all six of the railroad's main business segments.

The biggest drop in freight revenue came in the automotive sector, which fell 54 percent to $163 million. Industrial products revenue fell 39 percent to $531 million.

Chemical shipping revenue fell 24 percent, intermodal revenue fell 23 percent, energy revenue fell 22 percent and agricultural revenue fell 21 percent.

Randy Cousins, an analyst with BMO Capital Markets in Toronto, said Union Pacific's earnings offer another reminder that the economy is still not in great shape. But he said the railroad has done an admirable job of controlling its costs during the recession.

Cousins said UP's results likely won't improve significantly until the overall economy begins to improve.

Over the past year, the railroad has been cutting its work force and parking thousands of railcars and locomotives to deal with the reduced demand. That continued in the second quarter.

Union Pacific said it currently has about 4,400 employees furloughed, and it has parked 60,000 railcars and 1,900 locomotives. Young said the railroad will be ready to quickly recall furloughed employees and resume using stored equipment when shipping demand increases.

The railroad also had about $1.7 billion on hand at the end of the quarter, up from $611 million a year ago. Young said the railroad plans to continue holding cash until the economy starts to improve.

Union Pacific also improved its productivity during the second quarter on a couple key measures. The railroad said its average train speed increased 20 percent to 27.4 mph in the second quarter.

Furthermore, the railroad reduced the amount of fuel it consumed by 27 percent to 229 million gallons as volume decreased.

Union Pacific operates 32,400 miles of track in 23 states from the Midwest to the West and Gulf coasts.

Through the first half of 2009, Union Pacific reported $830 million net income, or $1.64 per share, on $6.4 billion revenue. That's down from a year ago when the railroad reported $974 million net income, or $1.87 per share, on $8.4 billion revenue.‹