Following Alcoa's (NYSE: AA) preliminary glimpse of potentially stabilizing industrial demand in the old-guard economies of Europe and the U.S., along come the railroads to let us know whether the domestic portion of that glimpse was merely a mirage, or a Shangri-La of gathering recovery momentum.
Taking over the lead-off reporting position from eastern rival CSX (NYSE: CSX), western giant Union Pacific (NYSE: UNP) chugged into earnings season with a $775 million fourth-quarter profit ... a 41% improvement over the prior-year period! For the full-year 2010, Union Pacific carried a 20% revenue surge to an impressive 47% earnings boost.
Freight revenues for the fourth quarter expanded more notably than the underlying volumes carried, which speaks to the same pricing strength that helped sustain the industry through the darkest hours of the downturn. At 70.2%, Union Pacific's operating ratio stands 320 basis points ahead of the prior-year mark; although on this important profitability metric I suspect Canadian National Railway (NYSE: CNI) will continue to lead the pack.
Pinpointing the sources of particular volume strength, we find that carloads of industrial products yielded the greatest improvement, with a 23% increase (19% for the full year). Automotive volumes appear troublingly weak for the quarter, with a 3% fourth-quarter volume gain contrasting starkly with a 31% full-year surge. Though corroboration from my colleagues covering the automakers is required, this suggests to me that aggressively restocked auto inventories may be stalling on the showroom floors.
Intermodal volumes expanded a respectable 10% for the fourth quarter, though that's well below the solid 19% increase in Union Pacific's container traffic for all of 2010. In this case, extra caution is required when interpreting the data. You see, just as Apple recently revealed with respect to its fourth-quarter iPhone sales, Union Pacific's intermodal segment was constrained by capacity (rather than demand) during 2010. Explaining the need for ongoing investment in expanded intermodal capacity, CEO Jim Young lamented: "We left good revenue on the table last year."
Fools are strongly encouraged to stay tuned for additional railroad earnings results due for release next week. But as first glimpses go, Union Pacific tells a fairly upbeat tale of stabilized baseline demand for cargoes in multiple categories. At the same time, I must point out that overall freight volume declined 3.4% sequentially from the third quarter, so Fools may wish to keep their confetti bags sealed until we can gather additional data.
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