The winter of 2013/2014 was one most transportation companies—including railroads—would probably like to forget.
As the so-called polar vortex lashed the Midwest, Northeast and much of Canada, many railways were forced to shorten their train lengths and their crews' exposure to the frigid temperatures. The weather also delayed numerous shipments, which weighed on some railways' first quarter profits.
CSX Corp. (NYSE: CSX), for example, cited the brutal winter as the main reason why its first quarter earnings fell 13.9% from a year earlier. The company said the weather cost it $0.08 to $0.09 a share in higher expenses and lost revenue.
Polar Vortex Couldn't Keep Union Pacific Down
One railway that managed to prosper despite the wild winter was Union Pacific (NYSE: UNP), a recommendation of our Personal Finance newsletter.
Union Pacific's roots go all the way back to the Civil War, when President Lincoln approved the Pacific Railroad Act of 1862 to encourage expansion in non-Confederate territories. Since then, it has grown through mergers and acquisitions, including the Southern Pacific, Missouri Pacific and Western Pacific railroads.
Today, the company operates a 32,000-mile freight network in the western two-thirds of the country, where it spans 23 states.
Union Pacific's revenue is well-diversified across six different categories of freight: intermodal, or containers that can be loaded onto ships, trucks or trains (20% of 2013 revenue); coal (19%); industrial products (18%); agricultural (16%); chemicals, including oil from U.S. shale plays like the Bakken, Permian and Eagle Ford (17%); and automotive (10%).
Despite the wintry blast—and an earlier caution from the company that the severe winter would affect its profits—its first quarter net income rose 13.7% from a year earlier, to $1.09 billion. Per-share earnings gained 17.2%, to $2.38, on a lo! wer share count due to Union Pacific's ongoing buybacks. That topped the consensus forecast by a penny.
Overall revenue rose 6.6%, to $5.64 billion, though that missed the Street's estimate of $5.70 billion. The company saw revenue gains across all of its segments except automotive, which was flat. Agricultural revenue rose 16%, followed by industrial (up 10%), intermodal (up 4%), coal (up 3%) and chemicals (up 2%).
A key metric of a railroad's health is its operating ratio, which measures operating costs against revenue (the lower the ratio, the better). Here, Union Pacific once again showed that it's among the most efficient railroads in the U.S., posting a record first quarter operating ratio of 67.1%, down from 69.1% a year ago.
"Union Pacific achieved record first quarter financial results, leveraging the strengths of our diverse franchise in the face of challenging weather conditions," said CEO Jack Koraleski. "We're proud of the efforts of the men and women of Union Pacific, who worked tirelessly to serve our customers despite these weather challenges and helped us achieve such a solid start to the year."
Geography Brings Special Advantages
Trains haul over 40% of America's intercity freight, and the railroad sector's prospects continue to look bright. Despite the unsteady start to the year, railroads are expected to post a 7.4% earnings increase over last year, according to an April 25 report from Zacks, while revenue is forecast to increase 4.4%.
There are a number of factors fueling the sector's ongoing growth. A major one is efficiency: according to the Association of American Railroads, shipping freight by rail is four times more fuel-efficient than doing so by truck. Moreover, railroad fuel efficiency is up 99% since 1980.
That, plus Union Pacific's concentration in the west, gives the company a significant edge over big rigs, according to Investing Daily analyst Benjamin Shepherd:
"In California, the toughe! st diesel! emission standards in the country come into effect this year, requiring the retrofitting of about one million trucks with smog filters," he wrote in the March 26 issue of Personal Finance.
"Many aging trucks will be forced to cease operation altogether. In another decade, no truck more than 13 years old will be able to operate in the state without extensive modification, requiring the trucking industry to replace much of its operating capacity. That will have a huge impact on West Coast freight rates for several years to come."
Intermodal Shipments Steaming Ahead
Many of the goods railroads ship are cyclical or seasonal in nature, but intermodal shipments continue to show steady growth. The American Association of Railroads recently reported that intermodal traffic rose 6.7% in the last week of April, compared to the same week a year earlier, while the 10-week moving average was up 8.5% from a year ago.
The long-term picture looks just as bright: according to the American Trucking Association's 2013 U.S. Freight Transportation Forecast, intermodal shipping will continue to be the fastest-growing freight mode, increasing by an average of 5.1% a year until 2018, before easing off to a 4.8% annual growth rate to 2024.
In response, Union Pacific has invested heavily in developing its intermodal capacity from the Port of Long Beach to Chicago. This year, it plans a total of $3.9 billion in capital expenditures, up from $3.6 billion in 2013.
Of that total, $1.1 billion will go toward projects that support the company's growth and improve its productivity, such as continuing to add a second line of track along the Sunset Corridor, which runs from Los Angeles to El Paso.
In addition, Union Pacific opened its $400-million intermodal facility in Santa Teresa, New Mexico, in April. The terminal, which is located along the Sunset Corridor, is near the Maquiladora industrial area in northern Mexico and will serve as a focal point for moving freight across ! the borde! r.
Thanks to rising trends in the industry and its own unique advantages, Union Pacific's revenue is expected to grow by more than $1 billion this year, to $23.5 billion. Earnings are forecast to jump from $9.42 a share last year to $10.91 in 2014, and analysts see profits continuing to climb, to $12.35 a share, in 2015.
With a lean operation and a strong presence in several growing markets, Union Pacific's growth looks set to chug along for years to come. Long-term investors should consider climbing aboard.
In the March 26 issue of Personal Finance, Benjamin Shepherd gave readers his very latest outlook for the railroad sector and revealed the names of two more railways that are primed for growth as the industry—and the U.S. economy—picks up steam.
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