- Quick Take
- Union Pacific's freight revenues rose by 6% annually in 2012, mainly owing to 7% rise is average revenue per car as the overall freight volume was flat in 2012
- While coal volumes declined by 14% y-o-y in 2012, the company was able to offset some of this decrease with an 11% gain in revenue per car within the segment
- Automotive and chemicals segment registered an annual revenue increase of 20% and 15% respectively in 2012
- Going ahead, we feel strong demand within automotive, chemicals and intermodal segment will continue to fuel growth for Union Pacific; however, headwinds in the agricultural and coal market will affect its volumes in 2013.
Union Pacific Corporation ( UNP ) is one of the leading railroad companies in the United States. Its freight revenues grew by 6% annually in 2012, mainly owing to core pricing gains and higher fuel surcharges, which led to a 7% gain in average revenue per car in 2012. However, its freight volumes in 2012 were almost flat compared to 2011, due to weakness in the coal and agricultural markets. Going ahead, we feel strong demand within the automotive, chemicals and intermodal segments will continue to fuel growth for the company in 2013. However, challenges in the coal and agricultural markets present headwinds for Union Pacific's volumes.
In this article, we evaluate the performance of each commodity group according to factors such as revenue, volume and average revenue per car. Further, we discuss the reasons for this performance and the outlook for each segment in 2013.
What Was The Performance Of Union Pacific's Different Business Groups in 2012?
|Commodity Group||% Contribution In 2012 Revenues||Revenue Growth In 2012||Volume Growth In 2012||Average Revenue Per Car Increase in 2012|
|Total Freight||100%||6%||- %||7%|
Key Reasons Behind The Performance Of Each Commodity Group And Their Outlook
Intermodal will be driven by highway to rail conversions
The 10% rise in revenue in intermodal shipments was mainly due to 8% increase in average revenue per car. Higher fuel surcharges, along with core pricing gains contributed to the increase in average revenue per car. The volume grew by 2% on account of higher truck to rail conversions as well as improved market conditions. In 2013, the domestic intermodal business will continue to be driven by highway to rail conversions, however, the international intermodal business may get affected in the short term due to weaker macroeconomic conditions.
Coal market will remain challenged due to competition from natural gas
While coal volume declined by 14%, the company was able to offset some of this decrease with an 11% increase in revenue per car within the segment. The coal business represents a major headwind for Union Pacific on account of increased substitution of coal, with cheaper natural gas for electricity generation. In addition, the loss of certain contracts also affected Union Pacific's coal volume in 2012. We expect challenging conditions in the coal market to persist in 2013, due to higher inventory and cheaper natural gas prices, which will impact Union Pacific's volumes in 2013.
If revenue ton-miles of energy commodities freight falls to 140 billion by the end of our forecast horizon, it represents 3% downside to our price estimate.
Higher construction activity and shale gas growth could drive industrial products
The 3% rise in industrial products' volume was due to increased shipments of frac sand, lumber, cement and stone. Increased drilling for energy products and higher construction activity contributed to the increase in shipments. In 2013, we expect higher construction activity and shale gas growth to bolster demand within this segment. However, certain categories such as military and hazardous waste shipments could be affected by reduction in federal funding.
Lower corn supply will continue to affect agricultural business in the short term
Agricultural shipments represent another headwind for the company as their volume was down by 4% in 2012.Drought conditions in the Midwest impacted the supply of corn, which led to a decrease in domestic feed grain shipments. Ethanol shipments were further affected by higher corn prices and reduced demand for gasoline. We feel this segment could remain under pressure in 2013, due to lower grain and ethanol shipments.
Crude oil business will fuel chemical product shipments
While chemical product shipments saw a significant volume growth of 13%, the revenue per car within this segment increased by only 2%. Significant increase in crude oil shipments along with higher plastics and industrial chemicals shipments contributed to the increase in volume. We feel this segment will continue to witness strong demand in 2013, owing to growth in crude oil shipments. However, y-o-y growth in 2013 could be lower due to higher revenue base in 2012.
Growth in auto industry to spur demand for automotive shipments
The automotive segment saw revenue increase of 20% on account of 13% rise in volume coupled with 6% increase in revenue per car. Higher shipments of finished vehicles and auto parts due to higher vehicular production in North America led to this volume growth. We believe automotive shipments will continue to see high demand in 2013, due to growth in the auto industry. The increased production of vehicles in Mexico is further benefiting Union Pacific as it is the only major publicly traded railroad company in the U.S., which connects to all six major trade junctions with Mexico.
Our $141 price estimate for Union Pacific is in line with the current market price.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.