Union Pacific Corporation Earnings: What to Expect

Union Pacific (UNP -0.88%) will release its quarterly report on Thursday, and the stock has been setting record highs for years as the boom in railroad activity has taken root. Even as rivals CSX (CSX -1.95%) and Norfolk Southern (NSC -1.47%) have had to deal with adverse trends in coal shipment volume, Union Pacific has been innovative in taking advantage of the boom in oil and natural gas production to change the character of its business, and reap more profits.

Railroads started their multi-year bull-market run about a decade ago, as energy prices rose dramatically and made more fuel-efficient rail transportation a big cost-saver over trucking and other types of transport. Union Pacific's geographical reach has served it well, giving it advantages over CSX and Norfolk Southern in serving key markets from the U.S. West Coast. Yet, competition still poses a threat to Union Pacific's strength in the long run. Let's take an early look at what's been happening with Union Pacific during the past quarter, and what we're likely to see in its report.

Source: Union Pacific.

Stats on Union Pacific

Source: Yahoo! Finance.

Can Union Pacific earnings keep growing?
In recent months, analysts have largely held steady on their views on Union Pacific earnings, cutting fourth-quarter estimates by $0.01 per share, but raising 2014 projections by $0.02 per share. Those amounts are relatively insignificant compared to its per-share earnings, but Union Pacific stock has kept climbing, with gains of 7% since mid-October.

Union Pacific's third-quarter-earnings report showed just how high expectations are for the railroad industry. The company reported record levels of revenue and net income, with an average 3.5% rise in rates helping to offset an overall lack of volume growth. Coal carloads fell by 7%, and agricultural products fell slightly, as well. But gains in cars and industrial products helped offset those weak areas, as did gains in chemical shipments supporting oil and gas production in shale areas. Still, with Union Pacific missing analyst earnings estimates, and warning that rate increases couldn't provide earnings growth for the long run, the stock sold off sharply.

Union Pacific has done a better job than Norfolk Southern, CSX, and other rivals in making the most of a flagging coal market. Even with falling coal volume, Union Pacific was able to boost revenue per carload by enough to produce an overall rise in coal-related revenue, defying declines of 7% at CSX, and 9% at Norfolk Southern. Strong operating margins have led to higher operating cash flow, as well.

But the big opportunity for Union Pacific has come from energy. Between getting the raw materials that producers need for their unconventional drilling methods and transporting crude oil out of hard-to-reach shale areas, Union Pacific has reaped rewards from its well-placed rail network. Moreover, the railroad has put huge amounts of money into expanding its reach to serve those needs better, with annual capital expenditures of $3.6 billion to $3.7 billion during the past two years to improve operating efficiency and safety. Canadian carriers Canadian National (CNI -0.20%) and Canadian Pacific (CP -0.40%) have also spent heavily to serve their respective customers in energy-rich areas of western Canada, but among U.S. railroads, Union Pacific has seen the best returns on invested capital recently.

In the Union Pacific earnings report, watch to see how the company's various shipment segments perform. With the U.S. economy starting to see its growth accelerate, the opportunity for Union Pacific and its peers to take advantage of potentially higher shipping volumes is only good news for the industry as a whole.

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