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Union Pacific (NYSE: UNP  ) , the United States' largest publicly held railroad company, posted second-quarter earnings that beat Wall Street estimates on the back of strong growth in freight volume.

After witnessing five consecutive quarters of volume growth, with particular robustness in demand for chemicals and industrial products, this company and its investors are looking forward to an even stronger second half.

The quarter unfolds
Revenue for the quarter rose 16% to $4.86 billion, beating Street estimates of $4.76 billion. Freight revenue rose across all categories, with revenue from energy being the largest contributor, jumping 14%. The company reported a profit of $785 million this quarter, a 10% year-on-year increase.

Naturally, higher fuel prices weighed on profits. In addition, flood-related issues pushed up operating expenses by 19% to $563 million. Operating margin fell to 28.7% from 30.6%. The company's capital position remains healthy, nonetheless.

Long-term debt at $8.7 billion was down 4% this quarter. The debt-to-equity, which fell to 48.8% from 54.1% a year ago shows the company is managing its debt well. An interest coverage ratio of 12.1 times further emphasizes the company's ability to service debts. Lastly, liquidity is ample, as suggested by the current ratio of 1.2 times.

The picture
The Association of American Railroads has already reported a 2.7% increase in carloads for the first 26 weeks of this year. This is certainly testimony to the upswing in demand for rail-based transportation. That figure can be expected to improve further as the economic recovery gains traction.

Peer Norfolk Southern   (NYSE: NSC  ) also reported that the quarter-to-date volume was up 3% due to strength from the automotive, intermodal, and coal segments. Echoing similar sentiments, competitor CSX (NYSE: CSX  ) recently reported a growth in overall freight volume alongside a 22% rise in per-share profits. Although prudent price increases and effective cost-cutting efforts added quite a bit to the profits, the key driver remained higher volume.

Union Pacific expects the volume of oil carried from the Bakken shale formation in North Dakota to U.S. Gulf Coast refineries to quadruple. So the general recovery across multiple industrial segments is as plain as the nose on my face.

The Foolish bottom line
The transportation industry started to witness a turnaround last year despite the fact the U.S. economy continues to hurl quite a number of challenges at freight companies. A compressed yet intensified peak season is expected ahead and Union Pacific is ramping up for it by increasing hiring. Fools should pay attention.

Fool contributor Debarati Bose does not own shares of any of the companies mentioned in the article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Related Tickers

10/21/2016 4:02 PM
UNP $90.37 Down -0.27 -0.30%
Union Pacific CAPS Rating: *****
CSX $30.29 Down -0.05 -0.16%
CSX CAPS Rating: *****
NSC $92.92 Down -0.21 -0.23%
Norfolk Southern CAPS Rating: *****