Before the opening bell Thursday, Union Pacific (UNP) reported strong results with its second-quarter 2021 earnings. Revenue of $5.504 billion (+30% YoY) outpaced the consensus estimate of $5.36 billion, while earnings per share of $2.72 (+63% YoY) exceeded the consensus estimate of $2.55 per share.
Business volumes as measured by total revenue carloads advanced a solid 22% versus the year ago period. Additionally, the company reported an operating ratio of 55.1%, representing a 590bps YoY improvement (450 bps better than we saw in 2019) and a beat versus expectations for a 56% ratio.
"The Union Pacific team leveraged volume growth, core pricing gains, and productivity to produce record quarterly results," CEO Lance Fritz said in the earnings release. "Beyond our strong financial performance, we also made progress on our goal to reduce our carbon footprint, which includes a 3% improvement in our fuel consumption rate. Importantly, these strong results were achieved in a challenging environment as our rail network continues to be impacted by supply chain disruptions, particularly in the Intermodal space. As we move into the second half of 2021, we will continue working with our customers and the broader supply chain to increase fluidity and efficiently handle the strong demand for freight transportation."
By business group, Bulk revenues were $1.648 billion (+19% YoY), outpacing estimates of $1.631 billion. Volumes increased by 13% and were compounded by a 5% increase in average revenue per car, which was a result of core pricing gains and higher fuel surcharge revenue. Grain & grain products revenue was $795 million (+23% YoY), outpacing estimates of $783 million as volumes increased 22% thanks to strength in both domestic and export markets. Fertilizer did $179 million in sales (+7% YoY), missing estimates of $222 million with volumes up 2% "due to strong agricultural demand and seasonality of fertilizer application." Coal & renewables were better than expected with revenue of $423 million (+15% YoY) topping estimates of $369 million as carloads were up 6%. Food & refrigerated was a tad light as revenues of $251 million (+22% YoY) missed estimates of $260 million despite a 17% annual increase in volume "driven primarily by higher consumer demand as the economy recovers from COVID, along with increased growth from truck penetration."
Looking to the second half of the year, Head of Sales Kenyatta Rocker commented, "We expect coal to remain stable for the remainder of the year based on the current natural gas futures as well as export demand. Our food and refrigerated shipments should continue to be strong as the nation recovers from COVID, coupled with truck penetration wins. We are also optimistic with our grain products business as ethanol shipments will improve from increased consumer demand and our focus in growing the renewable diesel market. And lastly, while we see positive signs for the upcoming grain harvest and strength in export demand, we expect tight supply in the third quarter as well as tough year-over-year comparisons in the back half of the year."
In Industrial, revenues of $1.859 billion (+24% YoY) was better than expectations of $1.817 billion as volumes increased by 15% and the average revenue per car advanced 8% "from a positive mix of traffic, core pricing gains and a higher fuel surcharge". Forest Products was a tad light with revenues of $348 million (31% YoY) slightly missing estimates of $354 million even as volumes grew 28% with Rocker noting on the call that "Lumber drove this increase from strong housing start, repair and remodel, along with further penetration from product moving over the road."
Meanwhile, Metals & Minerals revenue of $467 million (+27% YoY) topped estimates of $423 million as volumes advanced 12% "driven by increased rock shipments and stronger steel demand as the industrial sectors recover." Industrial Chemicals & Plastics revenues of $498 million (+14% YoY) exceed estimates of $480 million off an 11% increase in volumes with sequential improvement resulting from "the recovery of the Gulf Coast production rate from the February storm and improved demand." Energy & Specialized Markets revenue of $546 million (+27% YoY) fell just short of $562 million estimates. Volumes here advanced 20% annually though were down 1% sequentially "as strength in specialized shipments were offset by fewer crude oil shipments and seasonal LPG demand."
For the back half, Rocker commented, "As we look ahead to our industrial commodities, the year-over-year comps for our energy markets are favorable. However, there is still uncertainty with crude spreads supporting crude-by-rail shipments. We continue to be encouraged by the strength and the industrial production forecast for the rest of 2021, which will positively impact many of our markets. In addition, forest products volume will remain strong for us in the second half of the year."
Premium revenue was $1.625 billion (+50% YoY), slightly ahead of estimates of $1.6 billion. Volumes surged 31% and average revenue car per car jumped 14% from "higher fuel surcharge revenue, positive mix of traffic and core pricing gains." We saw strength in Automotive with revenues of $428 million easily outpacing the $363 million estimate as volumes surged 119% YoY, though we still saw a 4$ sequential decline "driven by shortages for semiconductor-related parts."
Intermodal revenues of $1.197 billion (+33% YoY) came in slightly below estimates of $1.275 billion despite volumes increasing 21%. Rocker noted that "domestic intermodal improved from continued strength in retail sales and recent business wins. Parcel, in particular, benefited from the ongoing strength in e-commerce. International Intermodal saw continued strength in containerized imports despite congestion in the overall global supply chain."
Looking ahead to the back half of the year, Rocker commented, "Automotive sales are forecasted to increase from 14 million units in 2020 to almost 17 million in 2021. However, we are keeping a watchful eye on the supply chain issues for parts related to the semiconductor chip. Now switching to intermodal. On the international side, we expect demand to remain strong through the rest of the year. The entire supply chain continued to be constrained by most notably the haul away of containers from our [NLEM] ramp. But I've been pleased with the collaboration between our commercial and operating teams as we work together to create solutions for our international customers to improve service and network validity. With regard to domestic intermodal, limited truck capacity will encourage conversion from over-the-road to rail, tempered by constraints on chassis supply. Retail inventories remain historically low and restocking of inventory, along with continued strength in sales, should drive intermodal volumes higher for the remainder of this year."
On cash generation for the first half of the year, cash from operations was $4.219 billion, representing a solid cash flow conversion rate of 96%. Union Pacific returned $5.4 billion in cash to shareholders in the first half and repurchased 19 million shares.
For the full year 2021, management raised its full-year volume growth to 7%, from roughly 6% level provided in the first quarter - notably, this improved guide "includes just over a 1-point headwind from ongoing energy market challenges." The team also solidified their operating ratio improvement guidance, dropping the low end of the previously provided 150 to 200 bps of improvement forecast, now targeting a firm 200b bps of improvement which should bring the ratio to a strong ~56.5% level. Moreover, thanks to the strengthening outlook, management said they now plan to return approximately $7 billion to shareholders this year through share repurchase, $1 billion more than originally planned.
Additionally, the team affirmed pricing gains in excess of inflation dollars, a $500 million improvement in productivity, capital spending of less that 15% of revenue, and a dividend target payout ratio of ~45% of earnings - that low payout ratio coupled with the strong cash flow conversion rate noted above should give investors plenty of confidence in the team's ability to continue returning cash to shareholders.
All in all, this was a very solid print from Union Pacific and clearly better than feared given the recent weakness in shares and today's reaction to the release. The improved guidance along with management's bullish commentary on the underlying dynamics behind it gives us confidence in the outlook for not only Union Pacific but the economy overall and other holdings such as Nucor (NUE) , American Eagle (AEO) , and Ford (F) . Should the supply chain clear up and the Delta variant prove to be a smaller headwind than feared, we believe this print points a strong second half for the stock and therefore we reiterate our One rating and $240 price target. Jim will of course be providing his most up to moment thoughts on the quarter during today's Daily Rundown, which will be out shortly!