We upgrade our recommendation for Union Pacific Corp. (UNP) to Outperform, following its second quarter 2010 financial results, which was far ahead the Zacks Consensus Estimate. The company generated record profit. This excellent performance was achieved through best-ever operating ratio, massive growth in business volume, cost control and pricing gains.
Second quarter 2010 operating ratio was at historic high-level of 69.4% compared with 77.4% in the prior- year quarter. This is the first time that Union Pacific achieved a sub-70 benchmark. Quarterly Consumer Satisfaction Index was 89% compared to 87% in the year-ago quarter. Second quarter 2010 business volume (total revenue carloads) was 2.18 million, up 18% year over year.
Union Pacific’s freight revenues should continue to benefit from strong pricing, reflecting both solid yield improvement and higher fuel surcharges. In the second quarter 2010, freight revenue grew 27% year over year. For the first time in six years, all the six business groups of Union Pacific posted volume growth in the same quarter. In the second quarter 2010, core pricing improved 5% year over year. This resulted in an 8% year-over-year increase in average revenue per car.
An improving U.S. economy, massive surge in automotive shipments, and a sharp rebound in many of the company’s end markets are expected to fuel future growth of Union Pacific. As the U.S. economy continues to grow gradually, demand for carriage also becomes robust and the momentum is expected to sustain in the long-run. We believe Union pacific is better insulated against economic uncertainty as approximately 37.0% of its revenues are tied to less cyclical freight like agriculture and coal.