January 20, 2012
If you leaned down and placed your ear on the track, you could hear the momentum building for Union Pacific (NYSE: UNP ) one year ago. By year end, this profitable locomotive was running full speed ahead.
The iconic railroad enjoyed the most profitable year in its proud 150-year history, delivering net earnings of $6.72 per diluted share for a 22% increase over 2010. Although boosted by the hauler's $1.4 billion binge of share repurchases during the year, the excellent result is a continued byproduct of flawless operations, massive infrastructure investments over the last decade, and moderate demand improvement across multiple freight categories.
I have stood in childlike awe of the North American railroads throughout this economic downturn, and Union Pacific's superb fourth quarter drops my jaw to the floor yet again. It may sound impossible, but Union Pacific absorbed a 28% year-over-year increase in average diesel-fuel prices during the fourth quarter, and yet still managed to boost earnings per share by the same 28% (with only a 3% increase in volumes hauled!). Combining an effective system of fuel surcharges with resilient demand, the railroad industry at large continues to avoid the margin squeeze that can assail other portions of the industrial economy in a rising-cost environment. For a recent example, have a glance at Schnitzer Steel's latest result. As defensive long-term investments to weather challenging business cycles, the North American railroads have proven their value in spades! Have a look at the following five-year chart:
I thought Norfolk Southern (NYSE: NSC ) was a stud, but get a load of those trailing returns from Union Pacific and CSX (NYSE: CSX ) ! Fools may recall that I viewed Norfolk Southern's designation as the primary eastern rail carrier for FedEx (NYSE: FDX ) as a noteworthy feather in its conductor's cap. Union Pacific enjoys a similar arrangement with United Parcel Service (NYSE: UPS ) for the region covered by its expansive rail network (23 U.S. states over the western two-thirds of the nation), and the company proclaimed perfect execution of its service to UPS during the recent peak holiday season. If fuel costs continue to rise -- as I think they are likely to do -- Fools can expect further continuation of the trend whereby freight is diverted from trucks and onto the rails. FedEx and UPS are both prime movers within this trend, and as it continues I will be looking for cozy boosts to late-year rail revenues for these carriers from peak-season packaged freight (within the intermodal category).