Union Pacific (NYSE:UNP) Reports Sales Below Analyst Estimates In Q3 Earnings

Freight transportation company Union Pacific (NYSE:UNP) met Wall Street’s revenue expectations in Q3 CY2024, with sales up 2.5% year on year to $6.09 billion. Its GAAP profit of $2.75 per share was 1.1% below analysts’ consensus estimates.

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Company Overview

Part of the transcontinental railroad project, Union Pacific (NYSE:UNP) is a freight transportation company that operates a major railroad network.

Rail Transportation

The growth of e-commerce and global trade continues to drive demand for shipping services, presenting opportunities for rail transportation companies. While moving large volumes by rail can be highly cost-efficient for customers compared to air and ground transport, this mode of transportation results in slower delivery times, presenting a trade off. To improve transit times, the industry continues to invest in digitization to optimize fleets, loads, and even braking systems. However, rail transportation companies are still at the whim of economic cycles. Consumer spending, for example, can greatly impact the demand for these companies’ offerings while fuel costs can influence profit margins.

Sales Growth

Examining a company’s long-term performance can provide clues about its business quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Regrettably, Union Pacific’s sales grew at a sluggish 1.8% compounded annual growth rate over the last five years. This shows it failed to expand in any major way and is a rough starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Union Pacific’s recent history shows its demand slowed as its revenue was flat over the last two years. We also note many other Rail Transportation businesses have faced declining sales because of cyclical headwinds. While Union Pacific’s growth wasn’t the best, it did perform better than its peers.

This quarter, Union Pacific grew its revenue by 2.5% year on year, and its $6.09 billion of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 3.4% over the next 12 months, an acceleration versus the last two years. While this projection shows the market believes its newer products and services will catalyze better performance, it is still below average for the sector.

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Operating Margin

Union Pacific has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 40%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Union Pacific’s annual operating margin might have seen some fluctuations but has generally stayed the same over the last five years, highlighting the long-term consistency of its business.

This quarter, Union Pacific generated an operating profit margin of 39.7%, up 3 percentage points year on year. The increase was encouraging, and since its operating margin rose more than its gross margin, we can infer it was recently more efficient with expenses such as marketing, R&D, and administrative overhead.

Earnings Per Share

Analyzing long-term revenue trends tells us about a company’s historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Union Pacific’s EPS grew at an unimpressive 5.1% compounded annual growth rate over the last five years. This performance was better than its 1.8% annualized revenue growth but doesn’t tell us much about its day-to-day operations because its operating margin didn’t expand.

We can take a deeper look into Union Pacific’s earnings to better understand the drivers of its performance. A five-year view shows that Union Pacific has repurchased its stock, shrinking its share count by 13.3%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.

Like with revenue, we analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For Union Pacific, its two-year annual EPS declines of 1.5% show it’s continued to underperform. These results were bad no matter how you slice the data.

In Q3, Union Pacific reported EPS at $2.75, up from $2.51 in the same quarter last year. Despite growing year on year, this print slightly missed analysts’ estimates. Over the next 12 months, Wall Street expects Union Pacific’s full-year EPS of $10.89 to grow by 10.3%.

Key Takeaways from Union Pacific’s Q3 Results

We struggled to find many strong positives in these results. Its revenue unfortunately missed and its EPS fell short of Wall Street’s estimates. Q4 revenue guidance also calls for similar revenue compared to this quarter, below expectations. Overall, this was a weaker quarter. The stock remained flat at $241.50 immediately after reporting.

Big picture, is Union Pacific a buy here and now?We think that the latest quarter is only one piece of the longer-term business quality puzzle. Quality, when combined with valuation, can help determine if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.