July 20, 2017 / 12:47 PM / 8 months ago

UPDATE 3-Rising freight lifts Union Pacific profit, beats expectations

(Adds analyst comments, details)

By Nick Carey

DETROIT, July 20 (Reuters) - The No. 1 U.S. railroad Union Pacific Corp reported a better-than-expected quarterly net profit on Thursday, driven by an 11 percent increase in freight revenue, and said it expected business volumes would pick up in the second half of the year.

The Omaha, Nebraska-based company’s second-quarter freight revenue included a 25 percent jump in coal. Major U.S. railroads have seen a resurgence in coal volumes this year, following two years of precipitous declines as many utilities switched to burning cheaper natural gas and as unseasonable weather resulted in large stockpiles of unburned coal.

On a conference call with analysts, Union Pacific executives said they expected coal volumes to stabilize in the third quarter compared with a year ago.

With the exception of automotive and chemical shipments, which were down 1 percent and 2 percent respectively, Union Pacific saw freight volumes rise across the board.

Higher fuel surcharges and rate increases for the freight it hauls helped boost revenue in the quarter, the company said.

“This was a really solid quarter,” said Dan Sherman, a senior analyst at Edward Jones, whose investment thesis is that Union Pacific’s focus on network efficiency means that rising freight translates more easily into earnings growth. “So far Union Pacific has shown that the whole thesis is working nicely.”

The railroad said it expects full-year 2017 freight volumes to grow in the “low single digits,” but that freight would be “closer to flat” in the third quarter.

“Absolute business volumes should be stronger in the second half than the first half,” Chief Executive Lance Fritz said in a statement, adding that Union Pacific’s long-term drive to cut costs would continue.

Union Pacific said it expects to cut costs by between $350 million to $400 million this year. So far this year, the company appears to be on track towards that target, having cut costs by $200 million.

The railroad’s operating ratio - or operating expenses as a percentage of revenue, a key metric for Wall Street analysts and investors - improved to a record of 61.8 percent, from 65.2 percent in the same quarter in 2016. Union Pacific’s long-term goal is for an operating ratio of 55 percent.

The company posted second-quarter net income of $1.2 billion, or $1.45 per share, up 20 percent from $1 billion, or $1.17 per share, a year earlier. Analysts had, on average, expected earnings per share of $1.39.

Union Pacific’s revenue in the quarter rose around 10 percent to $5.3 billion from $4.8 billion. Analysts had expected revenue of $5.2 billion.

Shares of the company were down 2.8 percent at $104.84 in morning trading on the New York Stock Exchange. (Editing by Bernadette Baum)

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