Looking at the bottom line, the company posted a 7% rise in its EPS, which stood at $2.74 per share, partly due to a 300 bps improvement in the operating ratio.
However, the situation reversed in 2021, with economic growth led by a rise in vaccination rate and a surge in oil prices. This led to an increased demand for railroads. Furthermore, the trucking industry continues to combat the driver shortage issue, and this has resulted in some movement of business to the railroads (intermodal).
2022 turned out to be challenging, with higher inflation, rising interest rates, and slowing economic growth. This has meant higher costs for railroad companies and a lower volume of carloads.
In 2018, utility coal shipments remained sluggish, while the coal export saw a strong uptrend, given the overall coal prices and demand in international markets. Exports weakened in 2019, and with natural gas prices falling sharply in 2020, coal demand has also declined. That said, 2021 and 2022 saw a rise in natural gas prices, sending the coal demand higher.
Below are key drivers of Union Pacific's value that present opportunities for upside or downside to the current Trefis price estimate:
For additional details, select a driver above or select a division from the interactive Trefis split for Union Pacific at the top of the page.
Union Pacific Corporation is the leading railroad network in the United States, primarily in freight transportation. Union Pacific Railroad (UPRR), the largest class-1 railroad in the United States, is the core subsidiary of Union Pacific Corporation. UPRR's route map covers most of the central and western United States, west of Chicago and New Orleans, covering nearly 23 states. Union Pacific competes with Burlington Northern Santa Fe Corporation (BNSF), which covers much of the same territory.
The company-owned tracks are a significant strength of Union Pacific. The company operates on 32,534 miles of track, of which 26,094 is owned, and the remainder is under trackage rights or leases. Union Pacific operates on crucial north/south corridors and is the only railroad to serve all six major gateways to Mexico. UP also interchanges traffic with the Canadian rail systems.
Union Pacific Railroad Company's business mix includes Agricultural Products, Automotive, Chemicals, Energy, Industrial Products, and Intermodal. Although the company's primary role is transporting freight, it also runs a substantial commuter train operation in Chicago.
Union Pacific's earnings depend upon the volume of freight contracts it sells and the price of those contracts. Its expenses primarily consist of labor, fuel, utility, and track maintenance. The largest of Union Pacific's customers include steamship lines, vehicle manufacturers, agricultural companies, utilities, intermodal companies, and chemical manufacturers.
Industrial Freight is the most significant contributor to Union Pacific's value.
Union Pacific's rail network links the major U.S. industrial hubs in the Midwest and the Western U.S. to export terminals in the Pacific Northwest, the Gulf Coast, and Mexico. In addition, the company also serves major domestic markets in the Midwest, West, South, and Rocky Mountain states. The company is well placed to benefit from the U.S. industrial output and its competitiveness in international markets.
An increase in natural gas prices in 2017 boosted the share of coal in U.S. electricity generation. Coal benefited from higher exports in 2018. However, coal shipments remained sluggish in 2019 and 2020. That said, 2021 and 2022 saw a rise in natural gas prices, sending the coal demand higher.
However, natural gas prices have seen a significant fall from $4 at the beginning of 2023 to a little over $2 mid-year, and almost $3 currently, due to falling crude oil prices and recession fears. This will likely weigh on coal shipment for railroads in the near term.