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Summary

  • Revenues increased 10% from last year and were helped by big increases in agriculture, industrial products, and intermodal freight.
  • Earnings per share increased by 21% from last year and 20% from last quarter.
  • I don't believe the 3% share reduction was necessary as I believe the stock to be fairly valued and not to mention that earnings increased pretty well.

The last time I wrote about Union Pacific Corporation (NYSE:UNP) I stated: "I like the stock but won't be buying into it this week." Since that article was published the stock is up 1.4% while the S&P 500 (NYSPY) is up 0.03% in the same timeframe. Union Pacific Corporation owns transportation companies, of which its principal operating company, Union Pacific Railroad Company, connects 23 states in the western 66% of the United States.

The company reported earnings before the market opened on 24Jul14 and on the surface the results were pedestrian with the company reporting earnings of $1.43 per share (in line with estimates) on revenue of $6 billion (in line with estimates). The stock dropped 0.72% the day it reported earnings and what I'd like to do at this time is delve into the weeds and pick out some highlights from different portions of the report to see if the stock is worth buying at the present time.

Segment Revenue

Segment Revenue (millions)

Q/Q

Y/Y

2Q14

1Q14

2Q13

Agriculture

3%

19%

$ 934

$ 910

$ 784

Automotive

12%

2%

$ 545

$ 488

$ 534

Chemicals

2%

3%

$ 913

$ 893

$ 890

Coal

3%

1%

$ 989

$ 961

$ 975

Industrial Products

12%

16%

$ 1,130

$ 1,011

$ 977

Intermodal

12%

16%

$ 1,150

$ 1,023

$ 993

Total

7%

10%

$ 5,661

$ 5,286

$ 5,153

Instantly what I noticed looking at the segment revenue is that agriculture freight increased 19% from last year thanks to a 15% increase in ethanol shipments. Agriculture freight accounts for 16% of total revenues. Agriculture freight includes whole grains, commodities produced from grains, and food and beverage products including fresh and frozen fruits and vegetables, dairy products, and beverages. The company has the majority of the access to American grain markets with its Midwest and West hubs. On a quarterly basis the revenue in the agriculture segment did increase 3%.

Another eye popping number is the 16% increase in industrial products from the prior year due to a 3% increase in average revenue per car and a 12% increase in volume. Industrial products accounts for 20% of total revenues. Industrial freight includes lumber, steel, construction products, paper, consumer goods, metals, and industrial minerals. On a quarterly basis the revenue in the industrial segment did increase 12%.

Intermodal revenues increased 16% as well from last year and accounted for 20% of total revenues. The increase in revenue was in similar fashion to that of industrial products with a 12% increase in volume and 3% improvement in average revenue per car. Intermodal shipments consist of a mixture of container and trailer shipments as well as time-sensitive delivery services for businesses willing to pay a premium.

Overall revenue increased 10% from the prior year and 7% from last quarter. Last quarter the one concerning item was the 10% decrease from 4Q13 in automotive shipments, but that revenue increased during this quarter. I'll continue to monitor it to make sure the trend is upwards.

Income Statement

Income Statement

Q/Q

Y/Y

2Q14

1Q14

2Q13

Freight Revenue

7%

10%

$ 5,661

$ 5,286

$ 5,153

Other Revenue

1%

12%

$ 354

$ 352

$ 317

Total Operating Revenue

7%

10%

$ 6,015

$ 5,638

$ 5,470

Compensation & benefits

-1%

5%

$ 1,246

$ 1,254

$ 1,185

Fuel

0%

7%

$ 923

$ 921

$ 863

Purchased services and materials

5%

9%

$ 636

$ 607

$ 585

Depreciation

1%

7%

$ 470

$ 464

$ 438

Equipment and other rents

1%

5%

$ 316

$ 312

$ 302

Other

1%

4%

$ 228

$ 226

$ 219

Total Operating Expenses

1%

6%

$ 3,819

$ 3,784

$ 3,592

Operating Income

18%

17%

$ 2,196

$ 1,854

$ 1,878

Other income

-42%

-4%

$ 22

$ 38

$ 23

Interest expense

4%

4%

$ (138)

$ (133)

$ (133)

Income before income taxes

18%

18%

$ 2,080

$ 1,759

$ 1,768

Income taxes

18%

19%

$ (789)

$ (671)

$ (662)

Net Income

19%

17%

$ 1,291

$ 1,088

$ 1,106

Avg. number of diluted shares

-1%

-3%

905

912.4

935.3

Earnings per diluted share

20%

21%

$ 1.43

$ 1.19

$ 1.18

On the income statement there was a 12% increase from last year for other revenue which helped close out a 10% increase in total operating revenue from the previous year. Total operating expenses increased 6% from last year as operating income increased a whopping 17% for the same timeframe. Income before taxes kept up at 18% from the prior year, but income taxes increased 19%. The increase in taxes didn't really affect net income much as a 17% increase from the prior year was posted. On the bottom line earnings increased 21% from the prior year and increased 20% from last quarter.

Balance Sheet

Balance Sheet

Q/Q

2Q14

1Q14

Cash and cash equivalents

-17%

$ 1,537

$ 1,857

Other current assets

5%

$ 2,966

$ 2,822

Investments

2%

$ 1,369

$ 1,344

Net Properties

2%

$ 44,901

$ 44,189

Other assets

15%

$ 789

$ 686

Total Assets

1%

$ 51,562

$ 50,898

Debt due within one year

-28%

$ 458

$ 632

Other current liabilities

-7%

$ 3,319

$ 3,556

Debt due after one year

9%

$ 10,385

$ 9,544

Deferred income taxes

1%

$ 14,301

$ 14,229

Other long-term liabilities

0%

$ 1,659

$ 1,665

Total Liabilities

2%

$ 30,122

$ 29,626

From the balance sheet perspective the company increased cash and equivalents by 30% from last year while increasing other current assets by 10% in the same timeframe. These two large increases helped total assets increase 2% from last year.

On the debt side of things the debt due within one year decreased by 10% which is a good sign, but other current liabilities increased 15%! On the whole, the liability segment of the balance sheet increased 4% from last year.

Conclusion

The company boosted the earnings per share by 3% thanks in part to the 3% reduction in outstanding shares. But I don't believe that the share reduction was necessary because they already had earnings beat, and because I believe the value of the stock to be fairly valued on 2015 earnings estimates. The 3% reduction in shares came at a cost of $806 million.

The company reported earnings which were 21% higher than a year before on 10% more revenue while the share price was up 8.28% in the past year excluding dividends. I definitely love that both revenue and earnings were up on a yearly basis. The results were great to me, but investors seem to think the results were mediocre as the stock dropped 0.72% after reporting while the S&P 500 increased in value by 0.02%.

Union Pacific is one of my favorite companies to listen to during earnings season because it provides me with insight as to what segments of the American economy are performing well. From this earnings report I glean that the industrial sector and agriculture are performing really well. Because of this observation I believe it may be a good time to try and find a stock within those two segments of the economy which hasn't reported earnings yet to see if I can catch a pop.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Source: The American Economy Keeps Moving With Union Pacific Reporting Good Earnings