What are your thoughts about Union Pacific (UNP) rail earnings and performance for Q4 2019?

20161212 Tonyhatch (Cropped)

Union Pacific suffered from severe headwinds, mostly but not entirely in “Energy” (coal down 22%, sand fully 53%) and “Premium” (down 15%); overall volumes were down 11% (double-digit!), revenues -9%.  EPS was off 5%.  But charged by a $535mm productivity gain (versus a goal of $500mm) and (fueled by) a 17% drop in the workforce, their OR actually declined 190bps to 59.7%.  That success, and the plans for another ~$500mm in productivity (and an 8% headcount reduction) – as well as a guidance of an increase in volume (second-half weighted, to be sure, although the spring flooding last year will help 2020 comparisons), led to the many (many) questions on UNP’s “conservative” guidance (~160bps in OR).  UNP produced a ROIC of 15.1%, down only 0.1 points – and thank you UNP for reporting this!

Some other reflections:

  • Industrials (flat) did well, on a relative basis – and that’s with Plastics up only 2% (where is that Texas boom?).  Meanwhile, within Ag, grain only being down 1% during the trade war seems like a pretty good performance.  However, to get a better overall idea of the markets, in this and all commodity sectors we look forward to comparing to BNSF later this month….).
  • Intermodal, affected by trade “policy”, the global and US economy, and loose truck capacity, was a black hole.  How much was their own rationalization wasn’t delineated, unfortunately.  Domestic IM was down 8%; International down 23% (versus tough comparisons – that will continue into Q1; and this is excluding Coronavirus impacts).  And finished vehicles dropped 13%, well below the overall production/sales numbers.  For 2020 that latter category received a “-“ forecast while both IM sectors received a “?” from CMO Kenny Rocker.  Again, the PSR-to-PHR pattern in IM since CN is a de-marketing to growth approach; UNP will lap, I believe, their de-marketing impact, and as of February 1 re-started almost 60 lanes (with CSX, and NS) that were cut at the beginning of this journey in 2018; the IM community had some questions about the scale of the announcement.
  • Operationally UNP improved in all six big KPIs they list car velocity by 5% (train velocity by 1%) and dwell by 13%; car trip plan compliance by 9 points to 76%; workforce productivity by 4% (as pointed out, despite the big volume drop).   The workforce was down by 17%, as noted, and train length was 16% longer – those are not unrelated statistics
    • COO Vena noted that there were, uh, more yards to gain – mentioning train length (and there was $150mm in additional Capex allocated for this), utilizing newly created “latent capacity”, headcount (forecast -8%; much questioned), fuel efficiency, locomotives and terminals/yards consolidation (currently focused on Chicago).
    • There was discussion of safety, and within the 5% increase in “other expenses,” there was an increase in casualty costs – but, no numbers!
  • Capex will decline – from $3.2B to $2.95B, but adding back that $150mm in specific targeted siding lengthening programs brings it back to even (ish).  In comparison, dividends (raised twice last year) totaled $2.6B and share buybacks were $5.8B.  UNP needs no more locos for a while, and PTC Capex is winding down.