An economic slowdown has yet to hit Union Pacific (UNP), the United States' largest railroad company. The firm earned $2.10 per share, $0.14 higher than consensus expectations and 32% higher than a year ago. As expected, revenue grew 7% year-over-year, to $5.2 billion. Although we think the firm sheds some light on pockets of growth in the US, we feel shares are fairly valued at current levels (please click here for report).
Union Pacific repurchased 3.8 million shares in the second quarter, but the big driver of increased profitability for the firm was fuel cost decreases. Total fuel expenditures fell 2% year-over-year (in spite of increased freight loads) thanks to the average cost of a gallon of diesel fuel falling to $3.21 from $3.29. As a result of lower fuel costs, improved operations, and fuel surcharge recovery, the firm achieved a record operating ratio of 67%.
Several of the firm's different transportation segments grew at vastly different rates. The coal industry, which remains plagued by overcapacity and cheap substitutes, dragged on results. Revenue from coal shipments fell 9% to $869 million on 17% less volume than the second quarter of 2011. With natural gas cheap and abundant, we do not see this trend reversing any time soon. Agricultural freight was also weak, as revenue only grew 1% to $854 million on shipments that fell 2%. We think drought throughout the MidWest could weigh on third-quarter results, but the segment will not be as challenged as coal.
While some segments struggled, others more than picked up the slack. Automotive, which we have singled out as one of the best performing sectors in the US economy, experienced 15% volume growth, propelling revenue growth of 25% to $475 million. The strong year-over-year volume acceleration in the automotive segment reinforces our view regarding the industry's robust recovery. Volumes in the chemical segment grew 12%, resulting in segment revenue growing 13% to $795 million. Intermodal transportation revenue also grew 10% to $1 billion on 3% volume growth. Though volume growth wasn't as strong in the intermodal segment, we think this showcases the resurgence of US exports. Growth in this segment could slow in the back half of the year due to the stronger dollar, but we think increased auto demand and industrial-products demand (up 14% on a year over year basis) will help mitigate this effect.
Union Pacific's second quarter provides a strong read-through for the health of industrial production in the United States. With the surge in auto demand, strength in aerospace and growth in exports, we think some sectors in the economy will perform well in the second half of 2012. Though the strong dollar may weigh on exports, it seems like domestic industrial demand will remain strong. We aren't fans of Union Pacific at its current price, and its Valuentum Buying Index score of just 3 means we'd stay away from the firm at this time.