Replies to post #1651 on The Rising Influence of Rising Affluence

[DewDiligence]

US rail carloads of metallic ores were +46% YoY in the week ending Nov 6, which was by far the largest growth of any segment of the US rail-transport market:

#msg-56665829

One-week data are highly volatile, of course, but the above data point stands out sufficiently to be worth noting.

[DewDiligence]

Breakdown of UNP’s Import-Export Business

  
                   Pct of   
                   Volume  Typical contents 
 Export to Mexico    5%    Grain, intermediate goods    
 Import fm Mexico    5%    Finished goods 
 Seaborne export     5%    Grain, finished goods, coal (New Orleans, Seattle) 
 Seaborne import     8%    Finished goods (Los Angeles/Long Beach) 
 =================  === 
 All import/export  23%  
 Domestic shipments 77%

Source: UNP’s webcast slides.

[DewDiligence]

Union Pacific Is Coming 'Round the Bend

[This piece from the current issue of Barron’s is pedestrian, but I agree with the author’s contention that UNP is a fine company whose stock has a compelling stock valuation.

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-51248395, #msg-57643285, and #msg-53310057 for related material.]

http://online.barrons.com/article/SB50001424052970203793504576059952586701430.html

›The nation's No. 1 railroad has emerged from the recession leaner and meaner. It's grabbing market share from trucks and preparing to raise prices. All aboard!

JANUARY 8, 2011
By ROBIN GOLDWYN BLUMENTHAL

If you listen carefully, you can almost hear the whistle blowing. Union Pacific, the nation's largest railroad, is getting ready to barrel down the tracks.

With oil prices up, trucks are proving increasingly weak competition. With demand for commodities booming, there's plenty for Union Pacific to haul across its 33,000 miles of track. And the company has been cutting costs and preparing to raise prices.

As the economy picks up, there may be no stopping this train. Earnings per share are likely to come in at about $6.50 this year, up from $5.43 in 2010, says Lisa Dong, a portfolio manager and analyst at the Westwood Holdings Group in Dallas, which added to its position in Union Pacific in the third quarter. Dong sees the stock (ticker: UNP) at $117 by year end, up more than 25%. Within three years, she says, the shares could approach $140.

The company already is delivering the goods. It posted double-digit revenue gains throughout its freight operations in the third quarter, including a 36% jump in the automotive segment [#msg-55886742]. Union Pacific is now closing the books on what CEO James Young tells Barron's will be "one of the greatest years in our company's history."

Based in Omaha, Union Pacific dates back to 1862, when it and the Central Pacific were charged by President Abraham Lincoln with constructing the nation's first transcontinental railroad. These days, the company has a market value of about $46 billion and runs some 1,000 trains across its tracks every day, guided by increasingly high-tech logistics systems. The trains are getting longer, too—sometimes as long as two miles.

Union Pacific carries everything from coal and fertilizer to clothing and cars. All told, it has "the most compelling commodity mix and the best pricing opportunity on its book of business," says Jon A. Langenfeld, an analyst at investment firm Robert W. Baird.

In an industry that now can raise prices well in excess of inflation, Union Pacific has an added advantage: Over the next few years it is due to renegotiate long-term contracts amounting to 12% of its 2010 revenue.

The company is increasingly efficient, too. Union Pacific took advantage of the economic meltdown to sharply reduce costs and to "prove that costs are more variable than people thought," says Dong of Westwood Holdings. The company cut about 11,000 workers, or 21% of its staff, helping trim operating expenses to a record-low 68.2% of sales in the third quarter, down from 76% in all of 2009. Executives have set a target of 65% to 67% by 2015.

Moves like that have made Union Pacific a formidable competitor in the consolidating group of publicly traded railroads. (Warren Buffett's Berkshire-Hathaway (BRK-A) bought Burlington-Northern Santa Fe for $26.4 billion in February 2010). Union Pacific has a projected long-term earnings growth rate of 15%, second among U.S. railroads only to Kansas City Southern (KSU).

The next sign of the company's performance will come on Jan. 20, when it reports fourth-quarter earnings. Though the company did well in 2009's last three months, earnings per share are still seen rising 35%, to $1.46.

Some say that the terrific performance is already reflected in Union Pacific stock, up 42% in the past 12 months. But the shares still trade at just 14.4 times year-ahead earnings, not bad at all, given the railroad's projected earnings growth and well off the five-year-average price/earnings ratio of 17.7. It looks as if there's still room for the shares to run.

Young is cautious about the economic outlook, but he does see business trends moving in the right direction. He detects much more bullishness among customers than he did a year ago, and he has even begun to selectively hire.

He sees the greatest opportunity in "intermodal" transportation, or moving goods between shipping ports and inland destinations. It is here that Union Pacific and other railroads are grabbing market share from trucks, long the leaders in domestic freight. Union Pacific's own intermodal business jumped 34% in the third quarter. With oil breaching $90 a barrel, that trend shows no signs of slowing.

"We've got good momentum, and we're investing for growth," says Young, who this year is plowing some $3.2 billion into new tracks and other projects. Meanwhile, he expects to continue boosting the dividend [already done twice during 2010 (#msg-56867751)]—it now yields 1.6%—and share buybacks. Investors, all aboard.‹

[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.‹