Slow Retail Demand Pulls Down Union Pacific’s 2Q16 Intermodal



Union Pacific’s 2Q16 intermodal revenues

In this part of the series, we’ll take a look at the largest contributor to UNP revenues: the intermodal business. Its revenues in 2Q16 declined 16% to $909.0 million from $1.1 billion in the corresponding quarter last year.

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Intermodal volumes

Shipments of domestic intermodal declined by 6% in the second quarter of 2016. This was mainly due to dullness in the demand for consumer goods. Volumes for intermodal containers and trailers declined 14% to 0.80 million from 0.94 million units on a year-over-year basis.

According to the Bureau of Economic Analysis, the retail inventory to sales ratio has been on a rise. It was 1.52 in March 2016 compared to 1.46 in January.

International shipments declined 22% in 2Q16. The business volatility of ocean streamliners and some clauses in a change of vessels have impacted international intermodal volumes. This has forced UNP to reduce the train length by 5%.

Management outlook

Union Pacific expects growth in its domestic intermodal business in the future. This will be mainly driven by increased highway conversions, although offset by higher retail inventories and slow retail sales.

The company anticipates a challenging business situation in international intermodal. This is primarily due to challenges in the trans-Pacific market and greater worldwide economic uncertainties. The company also expects uncertainties related to ocean carrier consolidation. This may impact the international intermodal side more.

Peer group intermodal revenues in 2015

Low spot rates for truckers has been affecting intermodal pricing for major railroads. With low to moderate crude oil prices, the highway-to-rail conversion has slowed down. This has impacted the intermodal of all railroads.

Let’s look at the change in intermodal revenues for UNP’s peer group in the first quarter of 2016:

  • Norfolk Southern (NSC): declined by 11.8%
  • CSX (CSX): declined by 2%
  • Canadian National Railway (CNI): increased by 1%
  • Canadian Pacific Railway (CP): declined by 7.7%
  • Kansas City Southern (KSU): declined by 10%
  • BNSF Railway (BRK-B): increased by 2.7%
  • Genesee & Wyoming (GWR): declined by 8%

Investors interested in the transportation space can consider investing in the SPDR S&P Transportation ETF (XTN). XTN holds 13.4% in US major railroads.

In the next part of the series, we’ll assess the performance of UNP’s agriculture products freight revenues.


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