We received good news yesterday on railroad company and Blue Harbinger 15 holding, Union Pacific. Specifically, the stock was up as the company announced earnings that exceeded analyst expectations. The earnings “beat” was largely the result of improved operational efficiency. Specifically, UNP improved its operating ratio to 60.3% which is a quarterly record.
However, Union Pacific has declined 14% over the last year while the S&P 500 is up 6%. The underperformance is due to decreased revenues. Specifically, coal freight revenue declined 18%, and industrial products and intermodal freight revenue fell 16% and 11%, respectively, versus a year ago. Less demand from China is a big reason for the decline. Additionally, the company is generating less revenue as fuel surcharges have also declined.
The silver lining of the revenue decline is that the company has dramatically increased its operating efficiency which will pay increased dividends when the company’s revenue slide turns around. Union Pacific is at a low point in the market cycle, and we believe this will eventually turn around. As contrarian investors, we believe Union Pacific has more upside potential over the coming years that the rest of the market. You can read our earlier UNP updates here, and you can read our complete UNP research report and thesis here.