Union Pacific Corporation Earnings Rise as Cost Cuts Offset Lower Freight Shipments

By Joe TenebrusoMarketsFool.com

Image source: Union Pacific.

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Union Pacific's (NYSE: UNP) fourth-quarter profit rose 2% as the railroad's cost-cutting initiatives more than offset a slight decline in revenue.

Business volumes, as measured by total revenue carloads, declined 3% year over year. The decline was broad-based, with Union Pacific seeing lower volumes in nearly all of its operating segments, including coal (9%), industrial (5%), chemicals (5%), automotive (3%), and intermodal (1%). However, one bright spot was Union Pacific's agricultural products segment, which saw volumes rise 8% in the fourth quarter.

Moreover, Union Pacific's freight shipments appear to be stabilizing.

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"While full-year volumes were down substantially year over year, we did see declines moderate in the fourth quarter," said CEO Lance Fritz in a press release.

A 1% increase in core price helped to offset Union Pacific's lower freight shipments, yet that figure was down significantly from 3.5% in Q4 2015.

In total, operating revenue fell 1% to $5.2 billion.

Cost cuts

In response to its lower shipment volumes, Union Pacific continues to adjust its resources, with its active locomotive count and train, engine, and yard workforce down 5% and 7%, respectively, compared to the year-ago quarter. In all, the railroad trimmed its total operating expenses by 3%. That helped Union Pacific's operating ratio -- a key metric defined as operating expenses divided by operating revenue -- improve 1.2 percentage points to 62%.

All told, operating and net income rose 2% year over year to $2 billion and $1.1 billion, respectively. And earnings per share, which were boosted by the $3.1 billion in share repurchases Union Pacific conducted in 2016, increased 6% to $1.39.

Looking ahead

Fritz is "fairly optimistic" that improving economic indicators will propel Union Pacific's business in 2017.

"Higher energy prices, favorable agricultural markets and improving business and consumer confidence all support a return to positive volume growth this year," said Fritz. "We continue to have confidence in the strength and diversity of the Union Pacific franchise, which will position us well to safely and efficiently leverage stronger volumes as our markets begin to rebound."

That's significant, because Union Pacific has struggled with declining volumes for much of the last two years. The company has done an admirable job of slashing expenses to mitigate the fall in demand, but cost cuts can only go so far.

If Fritz is correct that Union Pacific is set to enjoy volume-driven revenue gains in 2017, the railroad will have a much more powerful driver of profit growth working in its favor. And with its now-improved cost structure, Union Pacific could be poised to enjoy sharply higher profits should those revenue gains materialize in the year ahead.

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Joe Tenebruso has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.