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Union Pacific Beats Q2 Expectations, Margin Concerns Punish Stock

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UNP’s second-quarter earnings

Union Pacific (UNP), the number one US rail carrier company, announced its second-quarter earnings today before the market opened.

The company’s adjusted EPS came in at $1.98, which exceeded Reuters-surveyed analysts’ consensus estimate of $1.95 by 1.5%. The company surpassed analysts’ earnings estimate by a very thin margin. Its adjusted EPS rose 36.5% YoY (year-over-year) from $1.45 in the second quarter of 2017. Benefits from the tax rate cut and pricing gains gave a solid push to UNP’s bottom line in the quarter.

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However, the market was not impressed. Union Pacific stock opened at $137.38 and rose to $141.23 in the first hour of trading on July 19, but it fell to $139.06 during the middle of the day. The stock’s closing price on July 18 was $141.30. During UNP’s first-quarter earnings release, CFO Robert Knight said that he expected difficulties in achieving the company’s targeted operating ratio of 60% by 2019. Higher operating costs in the second quarter overshadowed the benefit of the company’s earnings beat.

Second-quarter revenue and key stats

Union Pacific exceeded analysts’ revenue estimate of $5.66 billion by 0.31% in the second quarter. The company reported revenue of $5.67 billion, up 8% YoY from $5.2 billion in the second quarter of 2017. UNP’s total revenue carloads rose 4% YoY in the quarter. Its average revenue per car rose by an equal amount. The premium segment, which mainly represents intermodal business (JBHT), and the industrial segment posted shipment growth of 6% each in the second quarter.

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The company’s operating margin contracted 110 basis points to 37% in the second quarter from 38.1% in the same period in 2017. Higher fuel usage, increased compensation and benefits expenses, and higher purchased services and materials costs led the rise in its total operating expenses. In the words of CEO Lance Fritz, “Network performance improved significantly coming out of the first quarter, but a tunnel outage and train-crew shortages created a headwind in June.”

Railroad companies’ second-quarter revenue growth

Union Pacific is the third major US railroad company (XTN) to report its second-quarter earnings. So far, CSX (CSX) and Canadian Pacific Railway (CP) have announced their second-quarter earnings. All three major carriers posted revenue growth driven by higher volumes and pricing gains.

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