Behind Union Pacific’s Rising Automotive Volumes—and Shrinking Revenues—in 1Q16

Union Pacific's 1Q16 Earnings Show Mountains and Valleys Ahead

(Continued from Prior Part)

UNP’s Automotive revenues and volumes in 1Q16

In 1Q16, revenues from Union Pacific’s (UNP) Automotive Freight division fell to $510 million, which represents a 1% YoY (year-over-year) decline over 1Q15.

UNP’s Automotive volumes rose by 7% YoY in 1Q16. Shipments of finished vehicles climbed by 5%, mainly due to consumer demand for technology and the safety features associated with that. According to the company, the SAAR (seasonally adjusted annual rate) was 17.1 million vehicles in 1Q16, as compared to 16.7 million vehicles in 1Q15. But this was well below the 4Q15 pace of 17.8 million vehicles.

The major reasons behind the current rally in automotive shipments include the following:

• lower fuel prices

• continued rise in demand for light-duty trucks

• preference to sport utility vehicles over passenger cars

UNP reported a 10% rise in automotive parts shipments in 1Q16. This was mainly backed by increased vehicle production and the continued focus on over-the-road conversions by automakers.

Management outlook

According to inputs gathered by UNP’s management, the light vehicle sales are forecasted to reach 17.8 million vehicles. This represents a 2% rise above the 2015 SAAR of 17.5 million vehicles and would be driven by the greater output of finished autos and parts, including over-the-road conversions. However, UNP also remains skeptical about sustained auto sales resulting from low gasoline prices in the remaining quarters of 2016.

Investors should note the importance of the growth story of the automotive business for UNP and its peers. UNP reported a mere 2.4% rise in automotive revenues in 2015 over the previous year.

Automotive revenues for peers during the same period are as follows:

• Kansas City Southern (KSU)—8% decline

• Canadian National Railway (CNI)—16% rise

• Canadian Pacific (CP)—2% drop

• Norfolk Southern (NSC)—3.5% drop

• CSX (CSX)—3% decline

• Genesee & Wyoming (GWR)—26.7% decline

Notably, all US Class I railroads except CP and CNI are included in the portfolio holdings of the Market Vectors Morningstar Wide Moat ETF (MOAT).

Now let’s take a quick look at Union Pacific’s operating margins.

Continue to Next Part

Browse this series on Market Realist:

• Part 1 - Union Pacific Surpasses Wall Street Earnings Estimate for 1Q16

• Part 2 - How the Widening of Panama Canal Could Affect Union Pacific

• Part 3 - Why Did Union Pacific’s Agricultural Shipment Revenues Slide in 1Q16?