Union Pacific's Q1 2017 Earnings Review: Top Line Growth, Productivity Gains Drove Earnings Improvement

Union Pacific released its Q1 2017 earnings result and conducted a conference call with analysts on April 27. The company reported a considerable increase in its earnings as a result of higher revenue and productivity gains.

UNP Q1 2017 Earnings Review

Union Pacific’s shipments rose largely due to a 16% increase in coal shipments. An increase in natural gas prices has resulted in a resurgence in the demand for coal from utilities. Natural gas prices are expected to average $3.10 per MMBTU in 2017, around 25% higher than in 2016, making the fuel less attractive vis-a-vis coal for utilities. Besides volume growth, improving demand conditions led to a 1% increase in core pricing for Union Pacific. Moreover, higher fuel prices boosted Union Pacific’s fuel surcharge revenue, translating into a 4% year-over-year increase in revenue per carload.

In addition to higher revenue, Union Pacific’s ongoing productivity improvement initiatives supported earnings growth in Q1. Lowering locomotive servicing and repair costs, improving resource utilization and other operational improvements drove $90 million worth of productivity savings in the quarter. From a strategic perspective, Union Pacific is committed to improving the efficiency of its operations to boost profitability. The company is targeting an operating ratio (operating expenses as a % of revenue) of 60% by 2019, which is a considerable improvement from the figure of 63.5% registered in 2016. Thus, the company is likely to continue to work on streamlining its operations in the coming quarters.

Looking ahead, Union Pacific’s shipment volumes should continue to grow on an year-over-year basis. Besides higher coal shipments, strengthening economic growth in the U.S. should translate into a growth in shipments across categories. Given the company’s ongoing strategic focus on boosting productivity, rising shipments should translate into earnings growth for Union Pacific for the rest of year.

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1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Union Pacific

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