Union Pacific Railroad (UNP) stock was trading approximately 3.5% higher during the pre-market trading session on Thursday. The company reported strong second-quarter bottom-line results. The second-quarter results beat analysts’ expectations. Union Pacific’s second-quarter EPS of $2.22 beat analysts’ estimate of $2.14. The EPS marked 12% YoY (year-over-year) growth.

Union Pacific Posts Strong Q2 Results, Peers Struggle

Union Pacific’s bottom-line results mainly benefited from efficient cost management, lower fuel costs, and reduced outstanding shares. The factors mentioned above offset the negative impact of lower revenues. The company registered double-digit earnings growth in the previous six quarters.

Union Pacific’s second-quarter revenues were $5.60 billion—marginally lower than analysts’ estimate of $5.63 billion. The second-quarter revenues fell 1% YoY due to a 4% fall in volumes. The lower rail traffic volume more than offset the benefit of higher fuel recoveries and pricing gains.

The company’s latest financial results marked the second consecutive quarter with lower revenues. In the first quarter, Union Pacific reported a 2% YoY decline in its revenues due to a 2% fall in freight volumes. In the last two quarters, the results didn’t mirror the company’s fiscal 2018 performance. Union Pacific reported high-single-digit top-line growth in all four quarters of 2018.

Union Pacific’s operating ratio improved

Despite the dismal top-line performance, Union Pacific’s bottom-line results benefited from cost-saving initiatives. The company contained labor expenses and fuel costs during the second quarter, which lowered its operating costs. Union Pacific’s labor costs and fuel expenses fell 8% and 13% YoY in the second quarter. The average quarterly diesel fuel price fell 4% in the second quarter to $2.21 per gallon.

Adopting the PSR (Precision Scheduled Railroading) system helped Union Pacific reduce expenses and improve its operational efficiency. The company plans to bring its operating ratio below 60% by 2020 with the help of the PSR system. The ratio indicates operating expenses as a percentage of total revenues. As a result, a lower rate is better for a railroad company.

Union Pacific’s total operating expenses fell 7% YoY to $3.34 billion in the second quarter. Due to lower costs, the company’s operating ratio improved by 340 basis points to 59.6%—an all-time best for Union Pacific.

During the earnings release, Lance Fritz, Union Pacific’s chairman and president, said, “We delivered record second quarter financial results driven by exceptional operating performance, including an all-time best quarterly operating ratio of 59.6 percent.”

Peers’ expectations

Union Pacific isn’t the only US railroad company that’s facing declining rail traffic volumes. According to data provided by the Association of American Railroads, US rail traffic has fallen 4.3% in the second quarter. For the US, the ongoing trade war with the European countries and China led to a decline in freight rail traffic in the second quarter. Also, cheap natural gas prices and flooding across several North American regions contributed to the lower volume.

On Wednesday, CSX (CSX) reported a 4% decline in its overall rail traffic. The company’s intermodal units fell 10%, while the carload volume rose 1%. As a result, the company’s second-quarter revenues fell 1% YoY to $3.06 billion and missed analysts’ expectations of $3.14 billion.

On July 3, Norfolk Southern (NSC) reported that its second-quarter freight rail traffic fell 3.8% YoY. Analysts expect lower volumes to hurt the company’s revenue growth. For the second quarter, analysts expect the company’s top line to grow 1.8% YoY. The growth expectation is much lower than the 4.5% YoY increase the company registered in the first quarter.

Kansas City Southern (KSU) is expected to report a dismal top-line performance. Analysts expect the company’s revenue growth rate to slow down to 3.5% in the second quarter compared to the mid-single-digit increase it recorded in the previous three quarters.

With a YTD (year-to-date) return of 19%, Union Pacific has outperformed the broader market. The Dow Jones and the S&P 500 have gained 16.7% and 19.1%, respectively. The stock has also outpaced the iShares Transportation Average ETF (IYT). IYT, which invests in US transportation stocks listed on the Dow Jones, has risen 13.4% YTD.

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