[Volume and pricing growth were rock solid, but fuel costs were sky-high. UNP (and other US trunk railroads) recover fuel costs from shippers via a fuel surcharge that is applied with a time lag; hence, the lower profit margin caused by higher fuel costs is a transient phenomenon, but some investors do not seem to realize this. Moreover, higher fuel costs benefit railroads by making trucking less competitive, so they are bullish once the fuel-surcharge reset occurs with a slight lag.
All told, I’m not especially concerned about UNP’s quarter-to-quarter numbers. Why not? Because UNP has one of the widest competitive moats of any company in any industry and it’s a 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.]
NEW YORK, April 20 (Reuters) - Union Pacific Corp (UNP) reported higher quarterly profits and revenue on increased volumes in all commodities it ships, but missed earnings forecasts, sending its shares lower.
Volume should keep expanding with the economy, producing record profits this year, and fuel surcharges will offset much of the costs in coming quarters, the company said.
"The economy is moving in the right direction," growing albeit slowly, Chief Executive Jim Young said in an interview on Wednesday. "We outpaced the economy" in the quarter.
Raging fuel prices should push more freight delivery on to the rails, which are up to four times more fuel efficient than trucks, railroad executives and analysts noted.
The No. 1 U.S. railroad said first-quarter net income rose to $639 million, or a record $1.29 per share, from $516 million, or $1.01 per share a year earlier, but missed the consensus forecast by two cents.
Shares, which had fallen more than 4 percent, closed down 1.3 percent on the day with little net change on the results.
The biggest impact from supply disruptions caused by Japan's March earthquake and tsunami in Union Pacific's auto deliveries will be in the second quarter, but "it's not a huge impact," Young said.
Union Pacific will increase hiring to handle expected volume gains.
With consumer demand picking up for the goods it ships, the company also said its first-quarter 4.5 percent core price rise pace will not decelerate.
Volume growth, core pricing gains and increased fuel cost recovery bolstered earnings, the company said, noting that the 33 percent average diesel fuel price spike was the third-highest on record.
Volumes measured by total revenue carloads grew 5 percent in the quarter from the same period last year, despite harsh winter storms and fuel costs, driven by chemical and industrial products, the company said.
Both Union Pacific, and No. 2 railroad CSX Corp (CSX) expect big gains in export coal as global demand swells, as well as in intermodal shipping.
Union Pacific plans to hire 4,500 employees this year, more than the 4,000 expected to be lost to attrition. It will hire fewer if the economy falters.
Its profit miss appeared to be due to fuel, and that could largely be reversed as surcharges catch up, Jefferies & Co. said in a report[exactly right]. "So far we haven't heard anything that puts the rail volume, pricing, or margin (ex fuel) thesis at risk."
Analysts, on average, expected the Omaha, Nebraska-based company to report a profit of $1.31 per share. according to Thomson Reuters I/B/E/S.
Operating revenue gained 13 percent to $4.5 billion, topping the average estimate of $4.41 billion.
CSX beat estimates on Wednesday and also projected record profits in 2011 on higher volume and pricing.
"Both rails have turned in record first quarter operating ratios, and we're not terribly surprised by that but impressed that the historically slow moving industry is able to respond so quickly to demand during the last two years," said Morningstar analyst Keith Schoonmaker.
Pricing power above railroad inflation should continue, he said.‹
News 
Market Data 
Discover 
