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Union Pacific Rises to Highest Since 1980 as Profit Jumps

Union Pacific
Chris Kuhn checks the trucks on a switcher in the Union Pacific locomotive maintenance facility at the J.R. Davis Yard, in Roseville, California. Photographer: Ken James/Bloomberg

Union Pacific Corp. rose to the highest price in at least 31 years after the biggest U.S. railroad’s profit topped estimates amid shipment-volume gains.

The shares increased 2.2 percent to $112.18 at 4 p.m. in New York, the highest since at least July 1980, the last date for which Bloomberg data was available. Net income climbed 24 percent to $964 million, or $1.99 a share, compared with the $1.82 average of 25 analyst estimates.

Carloads advanced 3 percent in the quarter, with auto and chemical shipments leading gains as a strengthening recovery boosted demand. The company plans about $3.6 billion in capital spending this year, with about $1.3 billion for growth and productivity improvements like new locomotives, freight cars and track, Chief Executive Officer Jim Young said.

“The capacity piece is a little bit higher than what we’ve done,” in the past, he said in a telephone interview. “It reflects our confidence in the future in terms of how we see demand for rail service will go.”

Chemical carloads benefited from a 46 percent surge in petroleum shipments as Union Pacific transported more crude oil from the Bakken and Eagle Ford Shale regions, according to the company’s earnings conference call.

“There’s just a boom in drilling,” Young said. The company hauls steel pipe, so-called frac sand used in drilling and other materials in addition to moving petroleum from the regions to refineries on the Gulf Coast.

Petroleum Shipments

Union Pacific’s loads of steel, frac sand and petroleum may double this year to 400,000, Young said. While the company expects pipelines to eventually displace some petroleum movements, deliveries of frac sand and steel pipe will continue and railroad transportation of oil-drilling goods is “going to be a good sound business for us for a long time,” he said.

Revenue at Union Pacific rose 16 percent to $5.11 billion in the quarter, compared with the analysts’ average estimate of $5.06 billion. The company’s ratio of operating expenses to sales, a measure of efficiency, declined to 68.3 percent, a fourth-quarter record, from 70.2 percent in the same period of 2010. Rate increases propelled revenue advances in each of Omaha, Nebraska-based Union Pacific’s business groups.

“Their core pricing was up 5 percent in the fourth quarter, which is very solid considering where we are in the economy,” said Lee Klaskow, a Bloomberg Industries analyst in Skillman, New Jersey. He said the increases are related to re-pricing of legacy contracts and improving customer service.

Customer Satisfaction

Union Pacific’s customer satisfaction index was 92 in the quarter, an increase of 2 points from the same period in 2010.

“If customers are happy with the service you’re providing, there’s going to be less pushback in terms of when you’re increasing your prices,” Klaskow said by telephone.

Union Pacific re-priced contracts last year that hadn’t been renegotiated since at least 2004, mostly in the fourth quarter, Chief Financial Officer Rob Knight said in November. The re-pricing should benefit the company this year, Young said.

“Last year was kind of legacy-light in terms of the impact of pricing,” he said. “This year, we’re going to have a little bit better kicker from it.”

Union Pacific is the first major carrier to report financial results for the fourth quarter. CSX Corp. and Norfolk Southern Corp. plan to report next week. Union Pacific’s main rail competitor is Burlington Northern Santa Fe, which is owned by Berkshire Hathaway Inc.

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