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Why Union Pacific’s Industrial Products Revenues Could Play the Spoilsport in 2016

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Jan. 18 2016, Updated 4:28 p.m. ET

Union Pacific’s industrial products

Previously in this series, we reviewed the role that recent coal revenues could play in Union Pacific Corporation’s (UNP) earnings over next four quarters. In this part, we’ll assess Union Pacific’s industrial freight revenues.

Union Pacific’s industrial products group consists of construction products, minerals, consumer goods, metals, lumber, paper, and other miscellaneous products. This freight source contributed 18% to Union Pacific’s 2014 revenues. But in the third quarter of 2015, industrial revenues fell by 16% compared to the previous year.

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Do industrial products carloads in 4Q15 serve as indicators?

According to the weekly data supplied by Union Pacific to the Association of American Railroads, carloads of crushed stone, gravel, and sand went down by 24% in the fourth quarter of 2015 compared to the same period one year previously. Following suit, the carloads of metals and products dropped by 31%, and iron and steel scrap carloads tanked by 35%. The only exception were carloads of non-metallic minerals, primarily consisting of fractionating sand (used in crude oil drilling), which were up by 13% over the same period.

Union Pacific’s prospects in 2016

According to Dodge’s outlook for US construction industry, new construction starts in 2016 are expected to grow by 6%. At the same time, commercial construction is expected to grow at 10% per year until 2018. And we should note that housing growth also drives demand in cement, roofing, appliances, and aggregates. Union Pacific’s lumber, stone, and glass business correlates with housing starts.

However, the data just released by the Institute for Supply Management suggests that manufacturing activity in the United States has contracted. Industrial revenue headwinds coupled with higher stockpiles will most likely dampen Union Pacific’s industrial revenues in 2016.

Union Pacific’s major competitors

One of Union Pacific’s major competitors, BNSF Railway, is also experiencing similar revenue headwinds in industrial freight. The same is true with peer group companies like CSX Corporation (CSX) and Norfolk Southern Corporation (NSC), which operate in the Eastern US. Together with Kansas City Southern (KSU), these companies comprise all the Class I railroads in the US.

The iShares US Industrials ETF (IYJ) holds approximately 2.6% in UNP, about 0.9% in CSX, 0.86% in NSC, and 0.3% in KSU. IYJ holds about 4.6% in Class I railroads.

In the next part of this series, we’ll consider the impact of US grain exports on Union Pacific’s agriculture revenues.

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