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How Union Pacific's earnings results can help investors pick stocks

Adam Shapiro
·4-min read

Union Pacific Corporation’s (UNP) fourth quarter earnings report reveals valuable information that can help investors pick stocks as the U.S. economy recovers from the coronavirus pandemic.

“There's other strength in the economy, we think housing is going to be pretty good,” CEO Lance Fritz told Yahoo Finance. Union Pacific is one of the largest railroads in North America shipping just about everything from forest products to new cars.

The railroad’s fourth quarter 2020 results contain data points that show different kinds of freight shipments picking up. In Q4 forest products and lumber was up 9% year-over-year to $307 million and up from $284 million in the third quarter..

“There is a strong correlation between freight rail lumber movements and housing starts, a critical indicator of economic strength,” said Washington D.C.-based lobbying group The Association of American Railroads.

Housing starts rose 5.8% in December from November, up 5.2% year-over-year and reaching a 14-year high, according to U.S. Census Bureau data released Thursday.

Shares of homebuilders like Lennar (LEN), KB Home (KBH), and Toll Brothers (TOL) are up 0.4% to 2% over the past three months.

New residential construction home framing home against a blue sky
New residential construction home framing home against a blue sky

Where to find growth

Grain and grain products shipped on Union Pacific rails increased 15% to $801 million from $696 in 2019. The Teucrium Soybean (SOYB) ETF hit a 52-week high last month and is up 25% since October.

Fritz said the strong grain market is an export story that will continue in 2021 as the Chinese buy more U.S. grown soybeans.

“Part of that is they're supplying their own hog farms that have been rebuilt after a big swine flu epidemic that they faced earlier. And also, it's about fulfilling some of the commitments they made in the phase one China deal,” he said.

Other Union Pacific categories that saw growth in Q4 include intermodal shipments, up 9% to $1.09 billion from $1 billion last year. Industrial chemicals and plastics were also up 1% to $461 million from 2019, when it was $457 million.

The quarter’s improvements cap a challenging year for Union Pacific. The COVID-19 pandemic drove total revenue down 10% to $18.2 billion from $20.2 billion in 2019 and net income fell to $5.3 billion from $5.9 billion.

“The women and men of Union Pacific did a tremendous job of overcoming a fair amount of headwind,” Fritz said.

Where there is a slowdown

The biggest drop in Union Pacific’s Q4 was the 21% year-over-year decline in shipments of coal & renewables.

“There's a long term decline in the use of coal in the United States as a power generating fuel,” Fritz pointed out, adding it will continue in 2021. “We think the decrease in coal shipments might be as much as a one percentage point hit to our overall unit volumes.”

Set of train cars with coal transport by rail - countryside view
Set of train cars with coal transport by rail - countryside view

Other categories that saw declines in Q4 were metals and minerals, down 12% year-over-year. Automotive shipments also saw a 4% year-over-year decline to $486 million. But that was a dramatic improvement after the COVID-19 pandemic drove auto shipments off a cliff to $189 million in the second quarter of 2020.

“We think the automotive industry continues to recover,” Fritz predicted. New vehicle sales are expected to improve this year after falling 15.4% in 2020 to 14.46 million sold.

Fritz said Union Pacific is keeping an eye on a new round of government stimulus being debated in Congress, “and the question of how big and what's required to make sure that consumers are healthy.” The bigger question, he said, is how much global trade might improve.

“We've got to get COVID under control around the globe,” he said. Achieving that along with a healthy U.S. consumer would be what Fritz calls a “big mix impact” for Union Pacific.

Adam Shapiro is co-anchor of Yahoo Finance Live 3pm to 5pm. Follow him on Twitter @Ajshaps

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