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Union Pacific Beats Estimates, Buoyed by Efficiency Gains

·3 min read

(Bloomberg) -- Union Pacific Corp.’s profit topped analysts’ estimates on efficiency gains even as the largest publicly traded railroad hustles to keep up with a cargo surge that has jammed ports and left shippers fretting over transportation capacity.

Adjusted earnings per share were $2.72 in the second quarter, the company said Thursday in a statement, well above $1.67 a year ago when pandemic-related lockdowns temporarily put the brakes on freight. Analysts on average had expected $2.53 a share. Operating revenue jumped 30% from a year ago to $5.5 billion, compared with the average forecast of $5.38 billion.

Union Pacific’s efficiency rebounded from the first three months of the year when the railroad grappled with weather issues, including historic snowstorms that shut down Texas for about a week in February. The second-quarter operating ratio, a benchmark for efficiency in which a lower number is better, improved to 55.1% from 60.1% in the first quarter and 61% in the year-earlier period.

The results “were achieved in a challenging environment as our rail network continues to be impacted by supply chain disruptions, particularly in the intermodal space,” Chief Executive Officer Lance Fritz said in the statement.

The shares rose 2.7% at 9:45 a.m. in New York. Union Pacific climbed about 4.3% this year through July 21, trailing a 16% gain for the S&P 500 Index. Investors have soured on the industry this year, leaving Kansas City Southern, which has been spurred by a takeover offer, as the only major railroad to outperform the index.

Congestion at ports and the difficulties of quickly sending back empty containers have kept railroads, including Union Pacific, from taking more advantage of a shortage of trucking capacity to boost rail volume amid a robust economic recovery. Besides the rebound from steep cargo declines related to Covid-19 last year, U.S. railroad have struggled to increase volume. Profit growth for several years has been driven mostly through higher prices and improve efficiency, such as running longer trains.

Union Pacific’s carloads of 2.1 million in the second quarter were down slightly from 2.14 million during the same quarter in 2019, although up 22% from the same period last year. The company said it expects carload volume to rise 7% in 2021 and is targeting share buybacks of about $7 billion this year.

Shipping Halt

One sign of the recent struggles is Union Pacific’s decision to halt movements of international maritime containers from U.S. West Coast ports, including Los Angeles and Long Beach, to Chicago for about a week beginning July 19. The move is designed to help the railroad clear out a log jam of cargo at its Chicago rail yard.

The service disruptions are “transitory,” Fritz said on a conference call with analysts.

Union Pacific’s drive for higher prices and efficiency faces push back from the White House. President Joe Biden signed an executive order earlier this month to expand competition across the economy and called on the U.S. rail regulator to allow shippers to have in-transit cargo switched among railroads in search of lower pricing.

During a May 4 investor meeting, Fritz said Union Pacific will reach an operating ratio of 55% in 2022, which would make the railroad among the most profitable in North America.

(Updates with share trading, other details beginning in fifth paragraph.)

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