Rail freight giant Union Pacific (NYSE:UNP) reported progress in its renewed effort to improve operational efficiency in its fourth-quarter 2018 earnings report. The company's filing, released Thursday before the markets opened, also revealed relatively healthy revenue expansion. Note that in the discussion that follows, all comparative numbers are presented against the prior-year quarter (the fourth quarter of 2017):

Union Pacific results: The raw numbers

Metric Q4 2018 Q4 2017 Year-Over-Year Change
Revenue $5.75 billion $5.45 billion 5.5%
Net income $1.55 billion $7.28 billion (78.7%)
Diluted EPS $2.12 $9.25 (77.1%)

Data source: Union Pacific. EPS = earnings per share. 

What happened with Union Pacific this quarter?

  • Volume and pricing strength in the company's industrial and premium freight categories absorbed weaker trends in its agricultural and energy lines. Total industrial revenue increased by 10% to $1.4 billion, while premium revenue (which includes intermodal shipments) jumped 15% to $1.7 billion.

  • Agricultural revenue increased by a modest 5% to $1.1 billion, while energy slumped by 8%, also marking a top line of $1.1 billion over the last three months.

  • Fuel costs, a cyclical bane of the rail industry, continued to rise. Average diesel fuel price jumped 27% to $2.29 per gallon, although management indicated that it was able to partially offset this impact through increased fuel surcharges.
  • Union Pacific improved its operating ratio (total expenses divided by total revenue) by 1.1 percentage points to 61.6% against an adjusted fourth-quarter 2017 reading of 62.7%. The operating ratio is a widely watched gauge of railroad productivity (lower readings indicate higher efficiency).  

  • As I discussed last fall, in an effort to lower its operating ratio, Union Pacific recently adopted elements of the precision scheduled railroad model that competitor CSX has successfully employed over the last two years. Management has incorporated principles of scheduled railroading in the company's recently developed strategic blueprint, dubbed "Unified Plan 2020."

  • Some of these changes, explained in more detail here, were manifest in Union Pacific's operating metrics this quarter. Most notably, average terminal dwell time, a measure of train idleness between destination points, fell sharply over the last three months. Average dwell time decreased from 32.5 hours to 26.7 hours -- an improvement of roughly 18%.

  • Train velocity, however, can still be optimized. Average train speed during the quarter dipped 4% to 24.5 mph. Faster velocities generally indicated higher efficiency.

  • Operating income dipped 1.6% to $2.21 billion. The wide discrepancy in net income and diluted EPS between the fourth quarter of 2018 and the prior-year period (shown in the table above) is due to a $5.2 billion tax benefit recorded in the fourth quarter of 2017.

  • Union Pacific repurchased $1.2 billion of its own shares during the quarter, bringing its full-year repurchase total to a massive $8.2 billion, more than doubling the $4 billion in share buybacks completed in 2017.

Freight train with assorted cargo rolling on tracks against a backdrop of greenery and houses.

Image source: Getty Images.

What management had to say

CEO Lance Fritz's comments in the company's earnings press release were markedly different than last quarter, in which he acknowledged that Union Pacific needed to make more tangible progress in improving productivity.

With a solid single percentage point in operating ratio improvement in hand against the comparable quarter, Fritz today promised an extension of the Unified Plan 2020, which has so far been implemented across roughly half of the company's geographical footprint:

We reported record earnings for the quarter driven by strong volume growth, core pricing gains, and regaining positive productivity momentum," said Lance Fritz, Union Pacific chairman, president and chief executive officer.  "Building on this progress, we are advancing the implementation schedule for Unified Plan 2020.  Since starting this initiative in October, we have improved on-time service for our customers while at the same time eliminating excess costs and improving the utilization of network resources.

Looking forward

Union Pacific typically refrains from issuing quantitative earnings guidance. However, management indicated in the earnings release that it believes the railroad will see positive volume and revenue growth this year.

Fritz also left shareholders with the expectation that a steadily improving operating ratio will benefit the bottom line in the coming quarters, when he said the following: "We expect operating margins will increase as a result of solid core pricing gains and significant productivity benefits from our G55 + 0 [productivity] initiatives, including Unified Plan 2020."

Asit Sharma has no position in any of the stocks mentioned. The Motley Fool recommends Union Pacific. The Motley Fool has a disclosure policy.