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UP reported April 22 that it earned $1.341 billion, or $2.00 per diluted share, in the first three months of 2021—falling 9.02% from the prior-year period’s $1.474 billion.
Operating revenue came in at $5.001 billion, down 4.36% from $5.229 billion in first-quarter 2020. Business volumes for the quarter, as measured by total revenue carloads, declined 1% compared with 2020. This was “driven by declines in industrial [-11%] and bulk [-2%] shipments, partially offset by strength in premium carloads [+6%],” according to UP.
Among UP’s other first-quarter results:
• Freight revenue of $4.880 billion declined 5% from first-quarter 2020, “as core pricing gains were more than offset by a less favorable business mix [-2.25%], decreased fuel surcharge revenue [-2.00%], and volume declines [-0.75%],” reported UP, noting that bulk and industrial freight revenues were down 1% and 13% respectively, and premium freight revenue was up 2%.
• The operating ratio increased 110 basis points to 60.1% vs. the prior-year period. It was “negatively impacted by weather and rising fuel prices in the quarter,” according to UP.
• The fuel consumption rate, measured in gallons of fuel per thousand gross ton-miles (GTMs), was flat, compared with the same point in 2020.
• Quarterly freight car velocity was 209 daily miles per car, down 1% vs. first-quarter 2020.
• Average maximum train length was 9,247 feet, up 10% from 2020.
“The first quarter presented some real challenges that impacted our results, but the team did a great job managing the business,” UP Chairman, President and CEO Lance Fritz said. “We generated solid productivity through efficient use of our resources despite the significant weather event that covered most of our network in February and early March.”
UP Chairman, President and CEO Lance Fritz
Looking to the rest of the year, “an improving economic outlook, our continued commitment to value-based pricing that exceeds inflation, and the opportunity for strong productivity give us confidence to affirm our 2021 guidance,” Fritz said.
The railroad reported that it expected “full-year volume growth of approximately 6%.” In addition, it noted that “business mix headwinds continue”; there would be “pricing gains in excess of inflation dollars”; it would maintain a productivity outlook of at least $500 million; and there would be 150-200 basis points of operating ratio improvement. UP also said that capital spending would be less than 15% of revenue.
“During the quarter, our service product and lower cost structure enabled us to win new business and develop opportunities to grow,” Fritz added. “There are many more growth opportunities to capture by also helping our customers efficiently and reliably reduce the carbon intensity of their supply chains.”
Cowen Insight: ‘Full-Year Guidance Remains Intact’
Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl
“UNP [Union Pacific] posted a first quarter slightly below consensus expectations and our estimate, driven by the weather and fuel challenges seen during the quarter,” reported Cowen and Company analysts Jason H. Seidl (Managing Director and Railway Age Wall Street Contributing Editor), Matt Elkott and Elliot Alper. “An optimistic economic outlook and continued push into share repurchases (~$6Bn guided for 2021) position the company well to see double-digit bottom-line growth in 2021. We reiterate Outerform and maintain our $230 PT [price target].”
Cowen’s Key Takeaways:
• “EPS in the first quarter of $2.00 came in below our estimate of $2.08 and the consensus forecast of $2.06. Like other railroads that have reported 1Q results, weather negatively impacted UNP by $0.16 in the quarter and fuel surcharge lag cost them $0.11. While we adjusted our model for anticipated costs prior to earnings, total costs came in higher than our projections. OR of 60.1% was approximately 100bps worse than last year. Rising fuel prices in the quarter caused a two month lag in fuel charge recovery, which negatively affected fuel surcharge in the quarter.
• “In terms of carloads, grain and grain products were the highlight of the quarter, growing 16%, followed by intermodal that grew 12.3%. While we expect grain strength to continue in the second quarter, mostly due to easy comps, we note difficult second-half 2021 comps. Domestic intermodal was +16%, which was driven by continued strength in retail/e-commerce and new business wins. Automotive was a laggard in the first quarter, down ~13%; although based on our recent carload data and management commentary, we expect a turnaround in this segment, and supply chain issues will normalize. UNP expects a negative outlook for coal in 2021 as natural gas prices are forecasted to improve.
• “2021 financial outlook remained intact, although slightly increased on the volume front to ~6% on the year. This will likely allow UNP to hit the high end of their OR guidance of 150-200bps of improvement in the year.
• “UNP remains committed to its buyback program, repurchasing $1.4 billion worth of shares in the quarter. On a full-year basis, the company expects to repurchase approximately $6 billion in shares. In terms of dividend target payout, the company continues to maintain a payout ratio between 40%-45% of earnings.
• “Management provided thoughts on the proposed merger between CP [and Kansas City Southern (KCS) or between] CN and KSU [KCS]. UNP does not support either proposed merger, and plans to actively participate in the STB [Surface Transportation Board] process. UNP does a large amount of business at the Laredo gateway that would be at risk with a proposed merger, which the company would have to resolve.
• “We tweak our 2021 earnings outlook to $9.65 from $9.70 to account for the first-quarter shortfall and slightly better-than-expected volume outlook for the remainder of the year. We have chosen to leave our 2022 EPS estimate of $10.95 intact, which leaves our price target of $230 unchanged. We view the pullback in shares as an attractive entry point given the intact 2021 outlook and positive economic backdrop.”
The post U ‘Solid Productivity’ in 1Q21, ‘Improving Outlook’ for 2021 (Updated, Cowen) appeared first on Railway Age.
This article first appeared on www.railwayage.com
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