Union Pacific profit rises 19 percent, beats views

NEW YORK—Booming shipments of coal, grain and fertilizer coupled to improved productivity drove Union Pacific Corp.'s second-quarter earnings up 19 percent, despite the impact of rising fuel costs and Midwest floods.

The nation's largest freight railroad operator also issued a third-quarter earnings prediction above analysts' current views, expecting strong pricing to counter volumes dragged lower by a softening U.S. economy. The Omaha, Neb.-based company also issued a full-year earnings prediction within a range of what Wall Street expected.

The company earned $531 million, or $1.02 per share in the second-quarter, compared with $446 million, or 82 cents per share, a year earlier.

Revenue rose 13 percent to $4.57 billion, from $4.05 billion in the 2007 second quarter.

The results soared past Wall Street's expectations. Analysts polled by Thomson Financial forecast profit of 92 cents per share on revenue of $4.51 billion.

Carloads of agricultural products such as grain rose 11 percent in the quarter. Shipments of energy related products, which include everything from coal to wind turbines, rose 2 percent. Chemical carloads rose 1 percent.

Shipments of industrial products fell 1 percent, reflecting the softening U.S. economy. Intermodal volumes, which involve freight transferred between truck and train, fell 6 percent. But automotive shipments declined by the biggest margin -- about 20 percent -- because of the struggling U.S. vehicle market.

Total volumes in the quarter dropped by 3 percent.

But the railroad was still able to post higher revenue in five out of six business segments as rates remained strong.

Revenue from shipments of agricultural products jumped 29 percent, and carload revenue for energy related products jumped 21 percent. Chemical revenue rose 14 percent, while industrial product revenue increased 9 percent. Revenue from intermodal shipments rose 7 percent.

Automotive was the only segment to post lower revenue in the quarter, down 9 percent.

Union Pacific's fuel bill was $1.16 billion, 54 percent higher than the year-earlier quarter. The railroad's average quarterly fuel price was up 64 percent, to $3.60 per gallon, compared with $2.20 in 2007.

In an interview with the Associated Press, Chairman and Chief Executive Jim Young said he believes the company can combat high fuel prices and a softening U.S. economy through continued improvements in network efficiency. This includes everything from speeding up its trains to cutting the time they sit in a station.

"When we came in to the year we were not expecting significant volume growth, and we balanced this with greater productivity improvements. We believe we still have a lot of upside here," he said.

The company expects to earn $1.10 to $1.20 per share in the third quarter. Analysts currently predict earnings per share of $1.15 per share, according to Thomson Financial. The company's prediction, which implies growth of about 10 to 20 percent over 2007, is based on carload volumes down 1 percent from the year-ago quarter and diesel prices of about $4 per gallon.

For the full year, the company expects profit of about $4 to $4.20 per share. The forecast is based on total volumes about 1 percent lower than 2007. Analysts expect $4.05 per share.

Before it completed a two-for-one stock split in May, the railroad forecast 2008 earnings of $7.75 to $8.25 per share. That outlook assumed relatively flat shipping volume through the year.

Young also said that as productivity improves, more customers will flock to the railroad, providing an opportunity for further growth. Young also noted agreements with the eastern railroads -- Norfolk Southern Corp. and CSX Corp. -- as a key driver of future productivity. One-third of Union Pacific's business is through relationships with these railroads.

The executive also said that these improvements and the diversity of its business should offset an expected future decline in auto industry production.

"We don't see anything related to consumer spending -- including autos or the housing market -- to bounce back this year," he said. "That's where the strength of our business in agricultural products and fertilizer really start pay off."

Union Pacific's largest customer is APL Ltd., a shipping company that operates in the Pacific region. General Motors Corp. is the railroad's second-largest customer, followed by a number of chemical companies and utilities.

"Someday, the economy is going to come back," Young said. "But to me, this really shows the diversity of Union Pacific's business."

In Thursday trading, Union Pacific shares slipped 15 cents to $77.18.