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Freight transportation company Union Pacific (NYSE:UNP) fell short of analysts' expectations in Q2 CY2024, with revenue flat year on year at $6.01 billion. It made a GAAP profit of $2.74 per share, improving from its profit of $2.57 per share in the same quarter last year.
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Union Pacific (UNP) Q2 CY2024 Highlights:
- Revenue: $6.01 billion vs analyst estimates of $6.06 billion (small miss)
- EPS: $2.74 vs analyst estimates of $2.71 (1.1% beat)
- Gross Margin (GAAP): 55.5%, up from 52.8% in the same quarter last year
- Free Cash Flow of $1.81 billion, up from $525 million in the previous quarter
- Market Capitalization: $144.8 billion
Part of the transcontinental railroad project, Union Pacific (NYSE:UNP) is a freight transportation company that operates a major railroad network.
Rail TransportationThe 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 GrowthA company’s long-term performance can give signals about its business quality. Even a bad business can shine for one or two quarters, but a top-tier one tends to grow for years. Regrettably, Union Pacific's sales grew at a weak 1.3% 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 annualized revenue growth of 1.5% over the last two years aligns with its five-year trend, suggesting its demand was consistently weak.
This quarter, Union Pacific's $6.01 billion of revenue was flat year on year, falling short of Wall Street's estimates. Looking ahead, Wall Street expects sales to grow 4.3% over the next 12 months, an acceleration from this quarter.
Operating Margin Operating margin is an important measure of profitability. It’s the portion of revenue left after accounting for all core expenses–everything from the cost of goods sold to advertising and wages. Operating margin is also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
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 isn't surprising as its high gross margin gives it a favorable starting point.
Looking at the trend in its profitability, Union Pacific's annual operating margin decreased by 1.5 percentage points over the last five years. Even though its margin is still high, shareholders will want to see Union Pacific become more profitable in the future.
This quarter, Union Pacific generated an operating profit margin of 40%, up 3 percentage points year on year. This increase was encouraging, and since the company's operating margin rose more than its gross margin, we can infer it was recently more efficient with its general expenses like sales, marketing, and administrative overhead.
EPS We track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company's growth was profitable.
Union Pacific's EPS grew at an unimpressive 4.8% compounded annual growth rate over the last five years. This performance was better than its 1.3% 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 13.8%. 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 also analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For Union Pacific, EPS didn't budge over the last two years, a regression from its five-year trend. We hope it can revert to earnings growth in the coming years.
In Q2, Union Pacific reported EPS at $2.74, up from $2.57 in the same quarter last year. This print beat analysts' estimates by 1.1%. Over the next 12 months, Wall Street expects Union Pacific to grow its earnings. Analysts are projecting its EPS of $10.64 in the last year to climb by 11.6% to $11.88.
Key Takeaways from Union Pacific's Q2 Results We struggled to find many strong positives in these results. Although its EPS slightly beat analysts' estimates, its revenue unfortunately missed and management cited uncertainty regarding sales volumes for the second half of the year due to variable coal demand. Overall, this quarter could have been better. The stock remained flat at $235.80 immediately after reporting.
