Image source: Union Pacific.
Union Pacific's (NYSE: UNP) second-quarter net income plunged 19% as the railroad saw sharply lower demand for its freight-hauling services. Freight volumes, as measured by total revenue carloads, fell 11% compared to the year-ago period.
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Union Pacific's freight revenue was down across the board, including coal (27%), intermodal (16%), industrial (14%), chemical (5%), and agricultural (3%). Even Union Pacific's automotive segment, which had been a bright spot in recent quarters, fell 13% in the second quarter. In total, operating revenue declined 12% year over year to $4.8 billion.
In an attempt to weather the negative impact of these lower freight volumes, Union Pacific continues to slash costs by furloughing employees and placing locomotives into storage. Still, even with these measures, Union Pacific's operating ratio -- a key metric defined as operating expenses divided by operating revenue -- rose to 65.2% from 64.1% in Q2 2015 as the sharp drop in revenue more than offset these cost cuts.
CEO Lance Fritz said in a press release, "While the second quarter was again challenging from a volume perspective, we continued focusing on initiatives that are squarely in our control, such as being productive with our resources, providing our customers with excellent service, and improving our safety performance."
All told, operating income declined 15% to $1.7 billion. Net income, which was impacted by higher interest expense, dropped 19% to $979 million. And earnings per share, helped somewhat by the $602 million in share repurchases Union Pacific conducted during the quarter, fell 15% to $1.17.
The macroeconomic headwinds that have plagued Union Pacific's business in recent quarters will likely continue to hamper the railroad's results in the months ahead.
"A soft global economy, the negative impact of the strong U.S. dollar on exports, and relatively weak demand for consumer goods will continue to pressure volumes through the second half of the year," said Fritz.
Yet Union Pacific's CEO noted that there are "potential bright spots" in certain segments of the railroad's business if "key economic drivers continue to strengthen as they have in recent weeks."
The cost reductions Union Pacific has enacted in past quarters position the company to profit handsomely once economic conditions recover. And while major freight hauling segments such as coal appear to be in a secular decline (as the world continues to shift toward cleaner-burning natural gas and alternative energy sources), other areas of Union Pacific's business, such as intermodal,could rebound sooner than some investors currently expect. As such, should Union Pacific's stock suffer a post-earnings sell-off, it could present an attractive buying opportunity in a business that has consistently rewarded long-term shareholders.
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