Union Pacific Corporation (UNP, Financial) reported fourth-quarter 2021 earnings results last week that came in above what Wall Street analysts had anticipated. Certain product categories had weaker volume, but pricing was up across the board.
To me, this shows that demand for product shipments remains very high, which should bode well for Union Pacific down the line. Let’s look closer at the quarter to see why I remain very bullish on Union Pacific.
Union Pacific reported fourth-quarter and full year 2021 earnings results on Jan. 20. For the quarter, revenue grew 11.5% to $5.7 billion, topping estimates by $120 million. Net income of $1.7 billion, or $2.66 per share, was a slight improvement from net income of $1.6 billion, or $2.36 per share, in the prior year.
For the year, revenue grew 11.6% to $21.8 billion, which topped expectations by $120 million. Net income of $6.5 billion, or $9.95 per share, compared positively to net income of $5.6 billion, or $8.19 per share, in 2020. Earnings per share were also 3 cents ahead of estimates.
The fourth-quarter operating ratio was down by almost 180 basis points to 57.4%. Much of this can be attributed to high fuel prices, which pressured the operating ratio by 100 basis points.
Looking at product categories, Bulk revenue grew 16%, driven by a 10% increase in average revenue per car load and a mid-single-digit improvement in volume. Coal and Renewable volume improved 13% due to strength in natural gas pricing. Fertilizer demand was quite strong, leading to 9% growth in volume. Fewer exports of grain on the Gulf Coast caused year-over-year volume to fall 1%. That said, grain shipments grew 15% on a sequential basis.
Industrial revenue grew 14% as volume was up 8% and average revenue per carload increased 6%. Metals and Minerals was the best performing product within this category, with volume growing 18% from the prior year due to a strong market for metals and rock. Paper demand helped lead to a 7% gain in Forest Products.
Premium revenue grew 1%. Volume cratered 14%, but average revenue per carload grew an outstanding 17%. Automotive volume declined 10% due to the ongoing shortage of semiconductors that has impacted global vehicle production. Intermodal volume decreased 15%, largely due to port congestions in key markets.
According to Yahoo Finance, analysts expect Union Pacific to earn $11.38 per share in 2022, which would be a 14.3% increase from last year and would be the company’s best year in its history.
Union Pacific’s fourth quarter wasn’t without blemishes. The operating ratio deteriorated and companywide carloads declined 4% during the quarter as well.
The positive is that issues weren’t widespread and appear addressable, or at least contained. The volume decline was almost all related to automotive and intermodal products.
And the declines weren’t related to demand. As previously mentioned, limited global supply of semiconductors used in vehicles continues to impact production. Port congestion on the west coast, which includes container ships waiting to dock and not enough workers to unload ships, led to a decrease in intermodal shipments.
The good news is that demand for both these products remains very high. Union Pacific can’t do much about chip shortages, but the company was able to realize higher prices on car loads. Revenue per car load was up 7% from the prior year. Even as volume was down considerably from the prior year, the increase in prices meant just a 3% decline in freight revenue for automotive.
A similar story emerged for intermodal. Despite a mid-teens percentage decline in volume, freight revenue for intermodal was actually higher by 3% for the quarter. This was due to a 20% hike in average revenue per car.
Supply might be limited in these two categories, but demand is incredibly high and customers are willing to pay steeper costs to ship vehicles and intermodal products. Sequential volume also improved for both of these product types, providing some evidence that the issues facing automotive and intermodal could be lessening. A combination of better supply coupled with high demand could be the next lever for growth that the company could pull.
Union Pacific is also taking steps to address supply issues where it can. The company recently announced that it would be the intermodal carrier for Schneider National beginning next year. This follows last year’s announcement that the railroad would be the exclusive provider of intermodal shipments for Knight-Swift Transportation.
The demand story is evident throughout Union Pacific’s business. Every product type saw higher average revenue per car load. Intermodal had the greatest improvement, but Coal and Renewables improved 19%, Grains grew 13%, Metals and Minerals were higher by 9% and Energy and Food and Refrigerated were each up 8%.
This wasn’t just a one quarter benefit either. Every product type had higher average revenue per car for the full year as well.
Union Pacific turned in a strong quarter given the circumstances that are pressuring several of its product types. Given the monopoly nature of the railroad business, pricing power is abundant, with every product type seeing higher average revenue per car compared to the prior year. Even weak areas, such as autos and intermodal, had considerably higher prices. Demand is there throughout the business even if supply is being pressured.
With shares of the company near $242, Union Pacific is trading at just over 21 times 2022 earnings estimates. This isn’t too far off the stock’s average valuation over the last five years.
Union Pacific isn’t necessarily cheap, but the company performed well during the fourth quarter and full year. The pricing power the company possessed in the quarter doesn’t appear to be subsiding either, given the strong numbers Union Pacific is expected to produce this year.
For investors looking for a high-quality railroad, Union Pacific brings a lot to the table, including a strong busines model and a long track record of high divdiend growth, including two double-digit raises in 2021.
At the moment, Union Pacific's key advantage is its ability to charge higher prices to ship products, something that doesn't appear to have dampened demand at all (and wouldn't, not unless something drastic were to affect the demand for things like food and energy).