Ask The Experts: February 5, 2019

Tony Hatch
Independent Transportation Analyst and Consultant

Q:  How is Union Pacific (UNP) and its new “$8B COO” faring in its Precision Scheduled Railroading (PSR) conversion?
A:  So far, good progress. But one discordant note – recently promoted from CIO to CIO/Strategy Lyndon Tennison is now…. ”retiring” days after being lauded on the earnings call.  This follows the “WTH?” pattern of long-awaited Investor Conference in May, change the C-suite out 6 weeks later, announce the switch toward PSR not long after….this, uh, process, involves hard change but the behind-the-scenes aspect seems a bit muddled. Union Pacific’s big earnings outperformance made it 4-for-4 for the rails (later 5-for-5 – and with travel and general weakness, CN has made it, just, 6 for 6), but more importantly, as the most focused on PSR convert, they showed “good pro-gress” (as 10-day-on-property new COO Jim Vena repeatedly said).  UNP showed 39% YOY EPS growth (about a nickel above optimistic consensus, and lowered their OR 110bps to 61.6%.  Volume growth was 3%, which will shake out below the industry average – have they already been doing some PSR adjusting?  As CEO Lance Fritz stated, they are ahead of schedule on their new (gulp) G55/Unified Plan (UP)2020 plan launched before Vena’s onboarding, last October (and, to be fair, launched some 4 months after their Investor Conference).  They are accelerating into the PSR rollout, as EVP-Operations Tom Lischer stated, and expect to complete full geographic implementation by mid-year.

Q:  It seems like Canadian Pacific (CP) has been reaching all of their goals. What are your thoughts?
  Canadian Pacific beat consensus in Q4/18 by some 6-7%, and last year by 41% (adj); their OR (adj) was 340bps lower to a (still hard to adjust to) 56.5%.  And still, there was talk about low guidance (“mid-single digit RTM growth, double-digit EPS growth”) and taking their OR even lower, on a full year basis.  Revenue growth was impressive (+18%) in Q4/18, but unit growth (the way I look at things) was more mundane - +5% (which will be more in line with the industry).  In that regard, the 8% increase in Opex and 10% in Comp/Benefits (headcount up 6% in 5% more cars handled) was….pretty good.  Pricing was obviously good (close to +4%; renewals more like +4.5%).  Operations/Metrics were stellar, actually – Dwell and Velocity improved by 6% and 3%, respectively, and safety was terrific (injuries down 14% and accidents down 31%).  Call it PSR, call it Canadian know-how – CP is running a pretty tight ship.  Their near term outlook has some revenue timing issues, no big real estate sales, improving more in H2 and into 2020 – but there are no dark clouds in their horizon.

Q:  What is the latest on the trade situation?
Ottensmeyer is a hero for his defense of NAFTA (1.0) and free trade, and it is true that NAFTA 2.0 was signed by all three nations.  But it hasn’t been ratified!  My best DC insider/expert things there will be a lot (a lot) of sturm & drang but that it will pass Congress.  But, still, it hasn’t yet.

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Alison Babcock