Union Pacific (NYSE: UNP) results fell short of expectations as the railroad works to reduce costs in a tough operating environment. Investors took the news hard, sending UNP shares down 5% as of 10:30 a.m. ET.
Operational improvements in a tough environment
Union Pacific is one of two primary railroads serving the western half of the United States, with more than 32,000 miles of track and access to key Pacific ports. But demand for shipping services has been soft so far in 2024 as large customers scale back orders due to concerns about the economy.
The railroad's third-quarter report reflects that challenging environment. Union Pacific earned $2.75 per share on sales of $6.09 billion, short of Wall Street's $2.78 per share on $6.14 billion estimate.
Union Pacific is in the early stages of a restructuring under the guidance of CEO Jim Vena, who was appointed in August 2023 with a mandate to make the railroad more efficient. Investors should be pleased to see net income in the quarter grew by 9%, compared to revenue growth of 3%, implying that Vena's work is paying off.
The railroad's operating ratio, a measure of how much it spends to generate $1 in revenue, was 60.3%, an improvement of 310 basis points year over year.
"Our third-quarter results demonstrate the success of our strategy," Vena said. "Improved safety and service performance supported solid revenue growth that we converted into double-digit improvement in third-quarter operating income and earnings per share."
Is Union Pacific stock a buy?
Investors were understandably excited when Vena took over, and there is clear evidence in the quarter that his impact is being felt on the organization. But shipping companies are cyclical, and results are tied to the overall macro environment, limiting the upside until economic sentiment improves.
Union Pacific is on the right track, but the journey will take some time.
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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Union Pacific. The Motley Fool has a disclosure policy.
