Please ensure Javascript is enabled for purposes of website accessibility

Why Union Pacific Shares Dropped 10.9% in February

By Neha Chamaria - Mar 9, 2020 at 7:31AM

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 railroad giant's projected 1% growth in volume for 2020 could be a tough goal given the coronavirus outbreak.

What happened

Shares of railroad giant Union Pacific (UNP 0.06%) fell 10.9% in February, according to data provided by S&P Global Market Intelligence. As if weak commodity markets weren't enough, the COVID-19 coronavirus outbreak has triggered fears of business conditions worsening. With Union Pacific's CEO Lance M. Fritz now also co-chairing a COVID-19 task force formed by The Business Roundtable, investors believe the concerns are real.

So what

Union Pacific reported a 10%  year-over-year drop each in operating revenue and net income for the fourth quarter in the third week of January, but that didn't hurt the stock's price. One reason is the company's operating ratio, which hit a record fourth-quarter low of 59.7%. As the operating ratio measures a railroad's operating expenses versus its revenue, a lower ratio is better.

Union Pacific shares were, in fact, holding up strong until the broader market sell-off mid-February. There's no clarity yet what impact the coronavirus outbreak is having or could have on rail volumes, but there's no denying that volumes are already on the lower side.

A freight car.

Image source: Getty Images.

One look at Union Pacific's latest weekly carloads and intermodal traffic data should give you an idea about the business conditions. Here are some numbers I dug up from the company's reports. The table below shows the year-over-year percentage changes in Union Pacific's carloads and intermodal in recent weeks.

Period (week ended) Total carloads Total intermodal
Feb. 1 (1%) (4%)
Feb. 8 (2%) (15%)
Feb. 15 (6%) (15%)
Feb. 22 (6%) (12%)
Feb. 29 3% (20%)

Data source: Union Pacific. 

One trend that's standing out is declining coal volumes. Coal has, in fact, consistently been the weakest end market for Union Pacific for several weeks. That's a worrisome trend as a back-of-the-hand calculation tells me that coal made up roughly 12%-13% of Union Pacific's total freight revenues in 2019, given that energy made up 18% of its revenue and coal the bulk of that segment.

During its Q4 release, management predicted volumes to grow only around 1% in 2020 given the weakness in coal and sand markets, in particular. The coronavirus outbreak could just make things tougher. The shipping industry was the first to bear the brunt of declining imports from China. Railroad and trucking are now feeling the heat as well, as lower volumes at ports hit intermodal volumes. Intermodal facilitates the transfer of goods from one mode to another, say from ships to trains and trucks.

Intermodal, part of Union Pacific's premium segment as it calls it, contributed 31% to the company's total freight revenues last year.

Now what

According to industry reports, employment in Class 1 railroads slumped to multi-year lows, with employment in January falling 12% year over year. Union Pacific already announced a planned layoff of 8% in 2020 during Union Pacific's Q4 earings conference call. More importantly, Fritz projected whatever "minor" growth in volumes to materialize in the second half of the year. Now with the unexpected coronavirus pandemic hitting volumes in the first half, investors aren't sure what to expect.

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 06/30/2022.

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.