Union Pacific's Higher Costs Cloud 2nd-Qtr Profit Beat

No. 1 U.S. railroad Union Pacific Corp’s second-quarter profit and revenue beat estimates on Thursday but costs related to a tunnel collapse that delayed its trains offset much of the gain from lower U.S. taxes.

The company said its quarterly operating ratio, a measure of operating expenses as a percentage of revenue and a closely watched gauge of railroad performance, increased 1.1 points to 63 percent from a year ago due to higher fuel and labor costs.

A lower operating ratio means more efficiency and higher profitability.

“Network performance improved significantly coming out of the first quarter, but a tunnel outage and train-crew shortages created a headwind in June,” Chief Executive Officer Lance Fritz said in a statement.

The company warned in April that it was unlikely to achieve an operating ratio of 60 percent in 2019 due to service problems and congestion on its rail network.

Freight revenue increased 8 percent in the quarter, boosted by higher volume, fuel surcharge revenue, pricing gains and a 14 percent jump in its premium business, which consists of transporting finished vehicles, auto parts, intermodal containers and truck trailers.

Still, core pricing was flat from the prior quarter, which disappointed analysts and investors who expected an acceleration.

“We would have thought contract renewals and a tighter truck market would be having a greater impact by now,” Bernstein analyst David Vernon said in a client note.

Union Pacific’s second-quarter net income was up 29 percent to $1.51 billion, or $1.98 per share. Revenue rose 8 percent to $5.67 billion.

Analysts, on average, expected profit of $1.95 per share on revenue of $5.66 billion, according to Thomson Reuters I/B/E/S.

The company’s effective tax rate was 22.1 percent versus 37.5 percent a year ago.

A tunnel collapse in Oregon in late May disrupted operations by forcing the railroad to reroute traffic, which added 4 to 5 days of travel time. Union Pacific connects 23 U.S. states in the western two-thirds of the country by rail.

The company’s shares fell 0.8 percent to $140.13.

Rival CSX Corp said on Tuesday that operating ratio fell more than expected to 58.6 percent from 67.4 percent a year ago, though profit also topped estimates. (Reporting by Lisa Baertlein in Los Angeles; Additional reporting by Arunima Banerjee in Bengaluru; Editing by Shailesh Kuber and Jeffrey Benkoe)

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