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Union Pacific to Miss 2019 Operating Margin Target, Stock Dives

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Apr. 26 2018, Updated 3:25 p.m. ET

Union Pacific’s 1Q18 earnings

The United States’ number-one rail freight carrier, Union Pacific (UNP), announced its 1Q18 earnings today. The company’s adjusted EPS (earnings per share) came in at $1.68, whereas Thomson Reuters–surveyed analysts expected $1.66. Union Pacific beat analysts’ adjusted EPS estimate by a narrow margin of 1.2%.

On a YoY (year-over-year) basis, the western US rail giant’s adjusted earnings per share were up 27.3% in 1Q18, compared to $1.32 in the first quarter last year. This solid double-digit rise was led by a favorable impact from the tax rate cut and pricing gains. However, markets were skeptical about Union Pacific’s performance on the operating margin front.

The company’s stock opened at $129.47, down 4.8% from the previous day’s close of $136.06. Later on, UNP’s stock gained ground and recovered 2.4% during early trading after chairman, president, and CEO Lance Fritz’s assurance to resolve service issues.

The company’s stock took a beating when CFO Robert Knight expressed difficulty achieving an operating ratio of 60% by 2019. An operating ratio is the flip-side of operating margins. The lower the operating ratio, the higher the efficiency as well as profitability.

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UNP’s 1Q18 operating stats

Union Pacific was able to beat analysts’ revenue estimate of $5.37 billion in 1Q18 by 2%. That quarter, the railroad reported revenues of $5.47 billion, up 7% from $5.13 billion in 1Q17. UNP’s total revenue carloads were up 2% in 1Q18. The company witnessed volume gains in energy, industrial, and premium merchandise freight. Shipment gains in these commodity groups more than offset agricultural products’ lower volumes.

The Omaha-headquartered railroad’s (XTN) operating margins expanded slightly, by 60 basis points to 35.4% in 1Q18, compared with 34.8% in 1Q17. A 22% rise in average quarterly diesel prices in 2018 led to higher fuel costs. But the railroad’s quarterly train speed was 4% slower than the first quarter’s levels last year.

Class I railroads’ service issues

Amid (JBHT) tighter truck capacity, railroads are experiencing higher road-to-rail conversions. More and more shippers are turning to rail networks as a result of higher fuel costs associated with trucks. This shift has created service issues for rail customers due to network congestion. The US Surface Transport Board has received customer complaints against major Class I railroads, including Union Pacific, CSX (CSX), and Norfolk Southern (NSC).

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