Please ensure Javascript is enabled for purposes of website accessibility

5 Things Union Pacific Management Wants You to Know

By Joe Tenebruso - May 25, 2016 at 10:20AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Union Pacific Corporation investors should take note of these key insights from the company's earnings call.

Image source: Union Pacific.

After Union Pacific (UNP 0.06%) reported its first-quarter results, its management team shared some important information with investors during the conference call. Here are the key takeaways for long-term shareholders.

1. Low crude oil prices continue to take a toll.

Year-over-year crude oil shipments were down 32% due to lower crude oil prices and unfavorable price spreads.
-- Eric Butler, EVP of Marketing and Sales

With the railroads becoming more dependent upon commodities to fuel growth in recent years, they've also grown increasingly exposed to downturns in the energy industry. And with crude oil prices down more than 50% over the past two years, Union Pacific's profits have likewise come under pressure. There's been a sharp reduction in demand for crude-by-rail shipments, as well as drilling related materials such as frac sand, which saw a 49% decline in carloadings during the first quarter. These headwinds are likely to continue to weigh on Union Pacific's results in the quarters ahead, as management expects demand for crude shipments and drilling-related mineral volumes to remain weak for the rest of the year.

2. The downturn in coal demand also remains troublesome.

Coal revenue declined 43% in the quarter on a 34% volume decline and a 13% decrease in average revenue per car.
-- Butler

Coal shipments fell even more than oil-related deliveries as warm winter weather, low natural gas prices, and a weak export market all contributed to lower demand for coal. But while declining U.S. production could lead to a recovery in oil prices in the coming years, coal rail shipments are likely to remain in a secular decline. The U.S., along with many other nations, is abandoning coal in favor of cleaner-burning natural gas -- and, increasingly, alternative energy sources such as wind and solar -- for its electricity production. This is a long-term global trend that will likely remain a drag on Union Pacific's results for the foreseeable future.

3. To meet these challenges, management is focused on slashing costs.

While near-term uncertainty remains in the current volume environment, we will continue adjusting our resources to demand while also realizing productivity through other company initiatives to further reduce costs.
-- Cameron Scott, EVP of Operations

To offset its lower shipment volumes, Union Pacific is thinning its employee head count and placing locomotives into storage. By the end of the first quarter, the company had reduced its active locomotive fleet by 15% and its total workforce by 11% compared to the year-ago period. Management is also seeking to improve efficiency and productivity as part of its companywide initiative to drive Union Pacific's operating ratio -- a key metric defined as operating expenses divided by operating revenues -- to 55% from its current level near 65%. In fact, management believes these efforts will not just alleviate short-term earnings pressure caused by lower volumes, but also help to fuel long-term profit growth, cash flow generation, and shareholder returns.

4. Despite the revenue decline, Union Pacific's cash generation remains strong.

In the first quarter, cash from operations totaled almost $2.2 billion, up slightly when compared to the first quarter of 2015.
-- Rob Knight, CFO

Union Pacific's operating cash flow exceeded $7 billion in both 2014 and 2015. With the first quarter of 2016 surpassing $2 billion, the company is on track to hit that mark again this year.

5. And management is committed to passing on that cash flow to investors.

Adding our dividend payments and our share repurchases, we returned about $1.2 billion to our shareholders in the first quarter.
-- Knight

In Q1 2016, Union Pacific paid $465 million in dividends and repurchased 9.3 million of its shares for $706 million. Even more significant is that, since initiating its share buyback program in 2007, Union Pacific has repurchased almost 27% of its outstanding shares. That's a trend that should continue, and investors can expect to be rewarded with additional share buybacks -- as well as a rising dividend stream -- in the years ahead.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Union Pacific Corporation Stock Quote
Union Pacific Corporation
$213.28 (0.06%) $0.13

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.