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Why Union Pacific’s Industrial Products Division Fell in 3Q15

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Industrial products

The revenue for Union Pacific’s (UNP) industrial products division fell by 16% to $979 million in 3Q15 compared to $1.2 billion in 3Q14. The division’s contribution to the company’s total revenue fell to 19% from 20% in the corresponding quarter last year. The company witnessed a 12% reduction in volume and a 4% fall in the average revenue per car.

The company’s network facilitates the movement of numerous commodities throughout North America, including minerals, construction products, consumer goods, lumber, paper, metals, and other miscellaneous products. Infrastructure investments in commercial, residential, and governmental projects generate shipments of steel and aggregates like cement components, cement, and wood products.

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Falling volumes

During the quarter, lower crude oil prices (USO) led to a reduction in shale drilling, which resulted in a 31% decline in minerals volume, primarily driven by a 36% decrease in frac sand car loadings. The volume for metals fell by 26% as lower crude oil prices suppressed drilling-related shipments and the strong US dollar resulted in increased imports. The road and construction projects in the Texas region led to a 1% rise in volumes for construction activity.

Outlook

The company expects activity from shale drilling to fall further as lower prices will push rigs out of the business. However, the demand for construction products is expected to remain strong on road and construction projects.

Return on equity

Over the last 12 months, Union Pacific’s return on equity was 25%. Its peers reported the following return on equity for the same period:

  • CSX (CSX) – 18%
  • Canadian Pacific Railway (CP) – 24.3%
  • Canadian National Railway (CNI) – 24.2%
  • Norfolk Southern (NSC) – 16.3%
  • Kansas City Southern (KSU) – 14.1%
  • Genesee & Wyoming (GWR) – 10.8%

Together, these companies form 0.56% of the iShares Russell 1000 Value ETF (IWD).

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