uploads/2016/01/UNP-Intermodal1.png

Why Union Pacific’s Intermodal Freight Revenues Could Disappoint in 2016

By

Updated

Union Pacific’s intermodal freight

In this part of our series on Union Pacific Corporation (UNP), we’ll consider the revenues of the company’s intermodal freight, which consists of freight transportation in an intermodal container using various modes like rail, ship, and truck. Union Pacific’s containers for import and export pass through US West Coast ports, where the company has an extensive terminal network. The domestic intermodal includes North American operations. Intermodal freight generated 20% of the company’s revenues in 2014.

Article continues below advertisement

Union Pacific’s intermodal carloads in 4Q15

Union Pacific’s one intermodal container or trailer equals one carload. The company’s containers in the fourth quarter of 2015 were down by 5% compared to the same period last year. The fall was significant in trailers, where it declined by 16% in 4Q15 on a year-over-year basis. This suggests that the company should see lower intermodal revenues in the last quarter of 2015.

Union Pacific’s intermodal revenue headwinds

Since January 2012, the ratio of retail inventory to sales in the United States is marginally going up. This means higher inventory pile-ups and low prospects of hauling for railroads. The company serves all six gateways on the US-Mexico border, and in September 2015, the Mexican government lowered its 2016 growth forecasts from 3.3% to 2.6%.

Otherwise, Union Pacific is expected to benefit from increased highway-to-rail conversions and new premium offerings in domestic business in 2016. Investors should also note that increased competition from trucking amid low crude oil price should help keep tabs on intermodal revenue growth in 2016. But lower international shipments over the next four quarters are expected to keep intermodal volumes under pressure. So Union Pacific’s intermodal revenues may not see much better pricing in 2016 compared to 2015, due to stiff pricing competition from trucking.

Peer group comparisons

Intermodal all over the US is rapidly emerging as a preferred answer to trucks. In recent years, major Class I railroads like CSX Corporation (CSX), Norfolk Southern Corporation (NSC) and Kansas City Southern (KSU) have witnessed strong growth in the intermodal business.

The iShares Transportation Average ETF (IYT) holds about 6.5% in UNP, around 6.8% in NSC, approximately 6.1% in KSU, and nearly 2.2% in CSX. Its total holdings in Class I railroads is ~21.5%.

Continue to the next part of this series for a close look at analyst estimates for Union Pacific. We’ll also analyze the potential factors that could influence the company’s earnings moving forward.

Advertisement

More From Market Realist