Union Pacific’s earnings exceed estimates amid cost cutting

The Omaha, Neb.-based railway saw earnings drop to $1.16 per share for the first quarter of 2016, compared to $1.30 per share for the first quarter of 2015.    Union Pacific Corp. reported first-quarter profit higher than analysts’ expectations as the railroad cut costs and boosted prices to mitigate a steep drop in cargo demand, pushing shares to their highest value in five months. 
   Earnings declined to $1.16 a share from $1.30 a year earlier, the company said in a statement Thursday. That beat the $1.10 average of 25 analysts’ estimates compiled by Bloomberg.
   Core pricing increased 2.5 percent, easing the impact of an 8 percent drop in freight volume. The company reduced its workforce by 5,175 from a year earlier and has put 1,400 locomotives in storage to adjust to the reduced shipping.
   “The commercial team really did an excellent job of securing 2.5 percent price in an environment where volume is down 8 percent,” Chief Executive Officer Lance Fritz said in an interview. “There are a lot of headwinds, as you can imagine in those conversations.”
   Union Pacific rose 5.4 percent to $88.38 at 12:58 p.m. in New York. The stock climbed to as high as $88.65, its highest intraday price since Nov. 9. The shares had gained 7.2 percent this year through Wednesday.
   Weakening demand for coal contributed to a 14 percent decline in first-quarter revenue to $4.83 billion. Large U.S. railroads shipped 33 percent fewer carloads of coal during the first quarter, pushing down total rail traffic by 6.5 percent, according to the Association of American Railroads’ weekly data. Low natural-gas prices, stricter environmental rules and one of the warmest winters on record have driven down coal demand.
   The decline in coal is “about as broad and significant as we’ve seen,” Fritz said. “While I won’t call a bottom, I’ll say we have a significant amount of headwinds that I would hope aren’t in place for the foreseeable future, forever.”
   Union Pacific’s coal carloads fell 34 percent in the quarter. Shipments of industrial products fell 10 percent, while automotive freight, one of the few bright spots for railroads, rose about 7 percent.
   The decline in cargo isn’t letting up. Union Pacific predicted that second-quarter volume would be down 10 percent, led lower by coal. The full-year percentage decline for cargo will be in the “mid-single digit” range, the railroad said.
   To crimp costs, the railroad cut its 2016 capital expenditures plan by 2 percent, dropping it by $75 million to $3.675 billion. Operating expenses declined 14 percent even as Union Pacific grappled with flooding that shut down track during the quarter.
   “We were particularly impressed with UNP’s cost performance given inclement weather in the southern U.S. in March, and constrained service performance last month,” said Robert Salmon, an analyst at Deutsche Bank AG, in a note.