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Why Did Union Pacific’s 2Q16 Automotive Revenues Slump?

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Union Pacific’s 2Q16 automotive revenues

In the previous part of the series, we looked at Union Pacific’s (UNP) coal revenues in 2Q16 and its prospects ahead. Now we’ll look at UNP’s automotive freight revenues in 2Q16.

In 2Q16, the company’s automotive freight revenues were $488.0 million, a declilne of 13% from $560.0 million on a year-over-year basis.

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Automotive volumes in 2Q16

Union Pacific’s automotive volumes declined 2% in 2Q16 compared to 2Q15. Revenues were hit by robust growth in auto parts volumes. This resulted in a business mix that was unfavorable for total revenues.

Shipments of finished vehicles declined 10%. Output levels of passenger vehicles that affected important UNP-served facilities negatively impacted finished vehicle shipments.

According to the company, the SAAR (seasonally adjusted annual rate) was 17.1 million vehicles in 1Q16 against 16.6 million vehicles in the same period last year. This somewhat indicates a pullback in customer demand. Auto parts volumes increased 6% in 2Q16. New over-the-road conversions led to the rise in auto parts volumes.

Management outlook

According to inputs gathered by UNP management, light vehicle sales are forecast to be 17.5 million vehicles in 2016 against 17.8 million projected earlier. The company expects lower gasoline prices to drive the demand for automobiles. The company also expects to bank on the growing automotive business in Mexico.

You should note that UNP’s automotive customers are expected to manufacture 5.0 million vehicles in Mexico. Since the company serves all the six gates on the US-Mexico border, it expects higher freight volumes there over time.

It’s interesting to know the growth story of the automotive business for UNP and its peers. UNP, headquartered in Omaha, reported a 1.0% fall in automotive revenues in 1Q16 compared to 1Q15.

Let’s look now at peer group automotive revenues for the same period.

  • Kansas City Southern (KSU): fell by 25%
  • Canadian National Railway (CNI): rose by 18%
  • Canadian Pacific (CP): rose by 11%
  • Norfolk Southern (NSC): rose by 16%
  • CSX (CSX): rose by 9%
  • Genesee & Wyoming (GWR): fell by 12.7%

Investors who want to invest in the transportation and logistics sector can invest in the iShares US Industrials ETF (IYJ). This ETF holds 5.5% in major US railroads.

In the next part, we’ll take a look at Union Pacific’s operating margins. We’ll also look at management’s efforts to improve operating margins.

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