The Rising Influence of Rising Affluence

[DewDiligence]

UNP Reports Solid 4Q10 Results, Bullish Outlook

[The share price has declined about 4% from the all-time high of 99.49 reached on Jan 13, but is up three-fold from the 2009 as freight volume grew in concert with the economic recovery. UNP has enormous operating leverage, so a modest increase in revenue can produce a very large increase in net profit, whichis exactly what has been happening (see 4Q10 metrics below).

4Q10 metrics: GAAP EPS $1.56, +44% YoY; revenue $4.4B, +17% YoY; carloads +9% YoY. 4Q10 YoY revenue growth by segment: agricultural 14%, automotive 7%, chemicals 15%, energy (including coal) 16%, industrial 27%, intermodal 25%. The bullish outlook for 2011 is qualitative insofar as UNP does not provide revenue or EPS guidance.

Additional 4Q10 references: UNP’s own 4Q10 PR is at http://www.up.com/investors/attachments/earnings/2010/4q2010pressrelease.pdf ; 4Q10 webcast slides are at http://www.up.com/investors/attachments/earnings/2010/4q2010_slides.pdf ; and the non-GAAP/GAAP reconciliation is at http://www.up.com/investors/attachments/earnings/2010/4q2010_slides.pdf .

I consider UNP a core long-term play on The Global Demographic Tailwind insofar as its rails lines provide a key link in US exports of grain and coal to emerging markets and US imports of finished goods from emerging markets. Please see #msg-58573323, #msg-51248395, #msg-57643285, and #msg-53310057 for related info.]

http://www.reuters.com/article/idUSTRE70J2XM20110120?feedType=RSS&feedName=globalMarketsNews&rpc=43

›Jan 20, 2011 12:50pm EST
By Lynn Adler

NEW YORK (Reuters) - Union Pacific Corp (UNP), the No. 1 U.S. railroad, reported quarterly profit and revenue that beat analyst forecasts on rising volume, but shares fell nearly 3 percent when the company did not provide a specific 2011 forecast.

"As we look ahead to 2011, we are encouraged by signs of a slowly strengthening economy," said Chief Executive Jim Young.

Volume growth, increased fuel cost recovery and core pricing gains boosted fourth-quarter 2010 earnings, the company said, reporting the most profitable year in its 150-year history.

Union Pacific stopped giving profit forecasts two years ago, which "may frustrate the outside world a little bit," Young said in an interview.

Shares of the railroad company, which carries everything from coal and grain to cars and chemicals, fell 2.6 percent to $94.75 at midday, having traded as low as $93.12 earlier. The shares had shot up nearly 50 percent in the past year.

The lack of a specific profit forecast 2011, and difficulty matching the types of gains posted over the past year, are driving profit-taking, said BB&T Capital Markets analyst John Mims. However, "if shares are weak today I would be a buyer."

Net income rose 41 percent to $775 million, or $1.56 a share, in the fourth quarter from $549 million, or $1.08 per share a year before. Analysts, on average, had expected profit of $1.48 per share, according to Thomson Reuters I/B/E/S.

Quarterly operating revenue rose 17 percent to $4.4 billion, topping analyst forecasts of $4.35 billion.

"Operationally this was a solid report, but it wasn't really much better than was discounted into consensus. Most of the beat was tax rate," said Peter Nesvold, an analyst at Jefferies & Co.

The Omaha, Nebraska-based company said its effective tax rate fell in the quarter to 34.3 percent from 36.8 percent a year earlier.

Still: "If they can sustain price increases in the 4 to 5 percent range, net of fuel, that should continue the upside to expectations as we progress through 2011," Nesvold said.

Union Pacific said its diesel fuel costs jumped almost 20 percent in the quarter from a year before, costing $111 million.

PRICING LEGACY

About 12 percent of Union Pacific's revenue comes from long-term contracts, mainly in coal and intermodal, that mostly come due by 2015 and are seen being renewed at sharply higher prices.

"Legacy" contracts representing about 4 percent of revenues will likely be repriced late this year, Young said.

"I have business today that we're hauling, losing money on every carload," he said. "We have got to get the financial returns on some of that business up or we won't handle it."

Union Pacific plans its largest-ever annual capital spending this year, at $3.2 billion, with expectations of improved financial results and a commitment to expand its network to handle its growing volumes.

Fourth-quarter business volumes, measured by total revenue carloads, grew 9 percent as all six of the company's business groups had volume growth for the third straight quarter.‹