Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Productivity Jumps at Union Pacific

By Asit Sharma - Jul 18, 2019 at 11:55AM

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

The North American rail operator counters faltering volume with higher efficiency and improved margins in its latest earnings scorecard.

For Union Pacific ( UNP -1.01% ), the second quarter of 2019 presented little surprise on the revenue front, as investors were expecting a smaller top line against the prior year, given weakening volume in the rail industry. But the company chalked up considerable progress on operational efficiency and cost control, as shown in its earnings filing issued Thursday morning before the markets opened.

Here are headline numbers and essential details from Union Pacific's results over the last three months. Note that all comparative numbers are presented against the prior-year period.

Union Pacific results: The raw numbers

Metric Q2 2019 Q2 2018 Change
Revenue $5.60 billion $5.70 billion (1.7%)
Net income $1.57 billion $1.51 billion 4%
Diluted EPS $2.22 $1.98 12.1%

Data source: Union Pacific.

What happened with the railroad this quarter?

  • Volume declined by 4% as lower energy and premium shipments offset industrial shipments and weighed on flat agricultural volume.
  • Freight revenue dropped by 2%. Higher average revenue per car due to core pricing gains somewhat mitigated the effect of weaker volume.
  • Union Pacific's Unified Plan 2020 productivity initiative yielded tangible results during the quarter. As I discussed in my earnings preview, the company had yet to realize much progress from its implementation of Precision Scheduled Railroading (PSR) principles over the last two quarters. However, having initiated PSR through the majority of its network, the railroad was due for an improvement in its operating ratio, or OR. This metric equals total expenses divided by total revenue and is an important gauge of efficiency in the rail industry. Union Pacific's OR plunged by 3.4 percentage points to 59.6% during the quarter (a lower reading denotes higher efficiency), marking an all-time record for the company.
  • The organization's operating margin improved by an impressive 340 basis points to 40.4%. Union Pacific's operating expense declined against the prior year in the categories of compensation, purchased services and materials, fuel, and equipment and other rents.
  • A wide range of metrics reflect the company's progress on its Unified Plan 2020 and improving efficiency. Freight car velocity improved by 4% during the quarter, though average train speed decreased by 6%. The company reduced average train dwell time by 14%, while notching a 19% increase in locomotive productivity (measured by gross ton/miles per horsepower/day) and a 4% increase in employee productivity (measured by car miles per employee). 
  • The company purchased $642 million worth of its own shares during the quarter, bringing its year-to-date buyback tally to $4.1 billion, inclusive of accelerated share repurchases of $500 million awaiting final settlement.
A cargo train proceeds through forested track beside a rolling river.

Image source: Getty Images.

Management's perspective

CEO Lance Fritz lauded Union Pacific's efficiency in the company's earnings press release Thursday. He also alluded to the difficulty of achieving improved results given lingering weather issues that stymied operations last quarter: "We delivered record second quarter financial results driven by exceptional operating performance, including an all-time best quarterly operating ratio of 59.6 percent. These results are a testament to the dedication of the men and women of Union Pacific, who are embracing Unified Plan 2020 and who worked closely with our customers to overcome numerous weather challenges."

Fritz signaled the potential for further progress in lowering the railroad's OR. The company now has its full-year target of booking an OR of below 61% within grasp. Fritz also hinted at further significant share repurchases in the back half of 2019: "We look forward to building on the momentum from Unified Plan 2020 and providing a consistent, reliable service product for our customers. We remain focused on driving increased shareholder returns by appropriately investing capital in the railroad and returning excess cash to our shareholders."

Looking forward

In my earnings preview, I discussed the possibility of Union Pacific offering up OR and margin improvement as an offset to a weaker top line. This scenario appears to have materialized, as management is focused on what it can control (efficiency and the exercise of cost discipline), as opposed to battling a macroeconomic environment in which trade uncertainty and slowing manufacturing output are pressuring rail industry volumes.

Shareholders welcomed news of stronger bottom-line profitability. The stock opened up firmly in the green following Thursday morning's earnings filing.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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
UNP
$233.25 (-1.01%) $-2.39

*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 service.

Stock Advisor Returns
656%
 
S&P 500 Returns
144%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/01/2021.

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

Our Most Popular Articles

Premium Investing Services

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