Saturday, January 24, 2015

Dramatic Q4 EPS Growth Propels Union Pacific Corp. into 2015

Union Pacific Corp released fourth quarter earnings on Thursday, January 22nd, showcasing yet another strong period of growth.  UNP stock climbed to $119.84 at the end of trading on Tuesday, where it began the day $114.95.  Common shares plateaued as trading carried through yesterday, finishing the afternoon slightly higher at $120.09.  UNP began its precipitous climb on the back of impressive revenue and earnings per share growth, solid margins, rising returns on equity, and a positive outlook entering 2015, among other factors. 

Quarterly revenue, clocking in at $6.15 billion, reflected volume growth in all six major freight divisions.  However, accumulating congestion at West Coast ports, especially Vancouver, has perhaps been the elephant in the room in discussions about growing volume.  In the face of labor disputes, Pacific shipyards have not been able to keep pace with freight volumes and frequently have been subject to slowdowns.  As top management prepares for a global supply disruption, federal mediators have been called in to avoid a total shutdown.  Despite these uncertainties, there are far more reasons to be optimistic about the state of revenue.  The real headline this quarter was, in fact, neither pricing power or nominal revenue growth but increasing turnover: the number of freight carloads and revenue per carload increased by 6% and 3%, respectively.  Quarterly revenue, in sum, grew 9% quarter-over-year, while full year revenue also matched this 9% growth, expanding to $23.98 billion. 

Earnings took the headline in this release.  Union Pacific recorded $1.43 billion in net income, an astounding 22% increase quarter-over-year.  Owing to effective cost-management, value creation from physical assets, and plummeting fuel prices, operating expenses declined in proportion to operating revenue; a 6% spread in total.  Nevertheless, despite faring well for Union Pacific up to this point, dipping oil prices provide further uncertainties for 2015.  Should energy producers begin to declare bankruptcy and cut supply, railroad companies will certainly face declining volume in oil and gas freight, along with complimentary materials like sand, used at oil shale sites.  However, output growth and promising employment data, regardless of counterintuitive inflationary data, should provide the general framework for growth in commercial transportation. 

Value has certainly been passed down to the shareholder.  Basic earnings per share logged $1.61 this quarter and $5.77 for 2014; a 27% and 22% increase, respectively.  The share repurchase program resumed this quarter, reducing outstanding common stock by 3% and conveying confidence to investors.  Shareholders also received a $0.50 dividend earlier this month, adding an attractive income yield to the total return of the stock.  Free cash flow declined this quarter, but was largely due to enormous cash outflows to shareholders and capital expenditures to expand the capacity of freight volume.  Return on Invested Capital rose to 16.2% from 14.7% in 2013- in part due to expanded debt obligations, but primarily due to earnings growth.  These gains in equity value have not gone without notice. Credit Suisse immediately raised its price target for Union Pacific from $130 to $136, and joined the other investment banks in upgrading UNP to “outperform,” an almost ubiquitous classification at this point. 
The investment thesis remains both accurate and descriptive, though new price targets will be needed in response to one of the aforementioned disruptions, a slowdown in growth next quarter, or an unforeseen contraction in the stock price in the weeks to come.  In all, 2015 looks very bright for Union Pacific Corporation.

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