What happened
A combination of concerns about demand and an underwhelming earnings report had Union Pacific (UNP -1.82%) shares on the slow track for most of April. The shares traded down 14.2% for the month, according to data provided by S&P Global Market Intelligence, as uncertainty clouded the transportation sector.
So what
Railroads and other transports are cyclical by nature, doing best when the economy is strong and there is a lot of demand to ship goods. Reports surfaced early in the month of April that truckers and to a lesser extent rail were suffering due to a flood of new capacity (mostly trucks) and waning demand as businesses adjust to soaring commodity prices. There was reason to fear that the Federal Reserve's resolve to fight inflation could crimp industrial activity, which could mean less demand for transports in the quarters to come.
Image source: Union Pacific.
At the same time, there was evidence that Union Pacific was struggling to keep its operations rolling. On April 14, CF Industries Holdings warned of nitrogen fertilizer delays due to Union Pacific mandating reduced volumes. Earlier in the year, Union Pacific had warned that COVID-19 cases would crimp operations.
Union Pacific's April 21 earnings report did little to ease investor anxiety. Though the company posted a modest beat on both earnings and revenue, CEO Lance Fritz admitted, "Operationally, we did not meet expectations, which is having an impact on our customers." Union Pacific also warned that pressure from rising fuel prices and operational issues could eat into margins for the whole of 2022.
Now what
Union Pacific is a good company caught in a tight spot. Although the railroad's operating ratio, a key metric of how efficient the trains are running, did not hit expectations, it was still a 70 basis-point improvement year over year. The company is a vital link between the West Coast U.S. ports and consumers, and as business eventually begins to normalize, Union Pacific has a key roll to play in solving the nation's supply chain woes.
Alas, while all those factors make Union Pacific an intriguing buy and hold, they say nothing about what the next few months will hold for this stock. Investors going along for the ride should focus on the long term.
