Union Pacific Tops Profit Estimates in U.S. Economy Rebound

Apr 17, 2014 4:18 pm ET

(Updates with closing share price in ninth paragraph.)

April 17 (Bloomberg) -- Union Pacific Corp.’s first-quarter profit beat analysts’ estimates as a strong harvest and a U.S. factory rebound boosted rail traffic amid harsh winter weather.

Rising U.S. industrial production in February and March drove shipments of manufacturing-related goods and consumer products at the largest publicly traded U.S. railroad, while shale-oil drilling fueled demand for sand and pipe. Agricultural revenue jumped 16 percent, the most of any cargo.

“It’s nice to see the basic building blocks of the economy coming back,” Chief Executive Officer Jack Koraleski said in a telephone interview. “I call it slow economic improvement and I love it.”

The U.S. economy is estimated to grow 2.7 percent this year, up from 1.9 percent last year, according to economists surveyed by Bloomberg. A fast rebound of the economy “always creates problems down the road,” Koraleski said.

Union Pacific became the third major U.S. railroad to beat estimates this week, joining CSX Corp. and Kansas City Southern, as the U.S. expansion gathers momentum. Net income jumped 14 percent to $1.1 billion, or $2.38 a share, Union Pacific said. Analysts had projected earnings excluding some costs and gains of $2.37 a share. Revenue rose 6.6 percent to $5.64 billion.

Housing starts have rebounded on an annual basis to almost 1 million in March, spurring cargo for lumber, appliances and furniture, Koraleski said. Union Pacific also hauls light vehicles, which are estimated to climb to 16 million this year, he said.

Winter Effect

The railroad, which serves the western U.S., was among the least affected by snowstorms that pounded the Northeast, slowing trains and adding costs for extra crews and fuel.

Koraleski said earnings per share were lowered 5 cents because of higher expenses related to the weather.

The stock rose 0.8 percent to $189.59 at the close in New York and has climbed 38 percent in the last 12 months. The Standard & Poor’s 500 Index has risen 20 percent in that time.

First-quarter pricing gains slowed from the previous three months, when more contracts were up for renegotiation, Benjamin Hartford, an analyst at Robert W. Baird & Co. in Milwaukee, wrote in a note to investors. He rates the stock as neutral.

Carloads rose 4.9 percent, Union Pacific said today. The railroad may be adding volume at the expense of BNSF Railway Co., the railroad owned by Warren Buffett’s Berkshire Hathaway Inc., which struggled with congestion, Justin Long, an analyst with Stephens Inc., wrote in a March 31 note.

Competitors Suffer

“The company is benefiting from a broad-based recovery in demand and service issues at its main competitor,” Long, who has an equal weight recommendation on the stock, wrote in the note.

BNSF’s service fell behind after it was hit by a record grain harvest, rising crude-oil volumes and the harsh winter that gummed up the Chicago rail interchange, Chief Executive Officer Carl Ice said in an April 2 interview. It may take the rest of the year to bring service levels back to normal in BNSF’s northern region, he said.

Railroads in the eastern U.S. were hit the hardest by this year’s storms. CSX Chief Executive Officer Mike Ward said in an interview this week that higher costs and lost sales because of the weather reduced earnings by 9 percent.

--With assistance from Frederic Tomesco in Montreal.