Please ensure Javascript is enabled for purposes of website accessibility

Union Pacific Corporation Earnings Plummet as Shipping Demand Falls

By Joe Tenebruso – Jul 29, 2016 at 2:58PM

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

As revenue declines, the railroad operator is slashing costs in an attempt to weather a macroeconomic storm.

Image source: Union Pacific.

Union Pacific's (UNP 2.04%) second-quarter net income plunged 19% as the railroad saw sharply lower demand for its freight-hauling services. Freight volumes, as measured by total revenue carloads, fell 11% compared to the year-ago period.

Union Pacific's freight revenue was down across the board, including coal (27%), intermodal (16%), industrial (14%), chemical (5%), and agricultural (3%). Even Union Pacific's automotive segment, which had been a bright spot in recent quarters, fell 13% in the second quarter. In total, operating revenue declined 12% year over year to $4.8 billion.

In an attempt to weather the negative impact of these lower freight volumes, Union Pacific continues to slash costs by furloughing employees and placing locomotives into storage. Still, even with these measures, Union Pacific's operating ratio -- a key metric defined as operating expenses divided by operating revenue -- rose to 65.2% from 64.1% in Q2 2015 as the sharp drop in revenue more than offset these cost cuts.

CEO Lance Fritz said in a press release, "While the second quarter was again challenging from a volume perspective, we continued focusing on initiatives that are squarely in our control, such as being productive with our resources, providing our customers with excellent service, and improving our safety performance."

All told, operating income declined 15% to $1.7 billion. Net income, which was impacted by higher interest expense, dropped 19% to $979 million. And earnings per share, helped somewhat by the $602 million in share repurchases Union Pacific conducted during the quarter, fell 15% to $1.17.

Looking ahead

The macroeconomic headwinds that have plagued Union Pacific's business in recent quarters will likely continue to hamper the railroad's results in the months ahead.

"A soft global economy, the negative impact of the strong U.S. dollar on exports, and relatively weak demand for consumer goods will continue to pressure volumes through the second half of the year," said Fritz.

Yet Union Pacific's CEO noted that there are "potential bright spots" in certain segments of the railroad's business if "key economic drivers continue to strengthen as they have in recent weeks."

The cost reductions Union Pacific has enacted in past quarters position the company to profit handsomely once economic conditions recover. And while major freight hauling segments such as coal appear to be in a secular decline (as the world continues to shift toward cleaner-burning natural gas and alternative energy sources), other areas of Union Pacific's business, such as intermodal, could rebound sooner than some investors currently expect. As such, should Union Pacific's stock suffer a post-earnings sell-off, it could present an attractive buying opportunity in a business that has consistently rewarded long-term shareholders.

Joe Tenebruso has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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 Stock Quote
Union Pacific
$212.77 (2.04%) $4.25

*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 11/29/2022.

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.