Union Pacific's (NYSE:UNP) second-quarter profit fell nearly 7% as a sharp decline in coal shipments dented revenues. Even worse, management hinted at further pain ahead.
"Solid core pricing gains were not enough to overcome a significant decrease in demand," said CEO Lance Fritz in a press release.
Total volumes declined 6%, due not only to sharply lower coal shipments but also significant volume decreases in industrial and agricultural products.
With the exception of the automotive segment, which rose 3%, Union Pacific's freight revenue was down across the board, including coal (31%), industrial (14%), agricultural (7%), intermodal (5%), and chemical (1%). All told, operating revenue fell 10% year over year to $5.43 billion, below Wall Street's expectations for $5.58 billion.
Union Pacific's operating ratio -- a key metric defined as operating expenses divided by operating revenues -- came in at 64.1%, 0.6 points worse than the second quarter 2014, even as average diesel fuel prices were 36% lower than in the year-ago period.
Working our way through the income statement, operating income fell 11% to $1.9 billion. Net income, boosted by a $113 million one-time gain related to the sale of land in California, declined nearly 7% to $1.2 billion. And earnings per share, aided by share buybacks, fell 3% to $1.38. That was above the $1.34 analysts were expecting, but judging by the more than 5% decline in Union Pacific's share price, the earnings beat provided little comfort to investors.
In response to declining demand, management is "right-sizing" its resources, including laying off workers and reducing its active locomotive count.
"While the volume outlook remains uncertain, we remain laser-focused on operating safely and efficiently no matter what the market environment," said Fritz in the earnings release. "We will continue to reduce costs and improve productivity as we further align resources with demand. Longer term, we continue to be optimistic about the strengths of our diverse rail franchise."
Although Union Pacific does not historically give earnings guidance, management appeared to hint that Wall Street's profit projections may be too high. "While we continue to improve, it is not likely at this point that we will achieve record earnings on a full-year basis, given this year's challenges," said CFO Rob Knight in a postearnings conference call. That suggests that Union Pacific will be unable to meet analysts' $5.82 consensus EPS estimate, which is above the company's $5.75 in earnings per share in 2014.
Union Pacific's earnings will likely remain under pressure if natural gas prices remain low, which tends to reduce demand for coal from U.S. power plants. A strengthening U.S. dollar could also remain a nuisance, as it increases the cost of U.S. coal for international buyers, thereby further reducing demand for Union Pacific's shipping services. Of course, should these trends reverse themselves, Union Pacific -- and its shareholders -- would likely benefit.