Old Economy Strikes Again: Why Investors Need to Keep a Close Eye on This Rail Stock

It’s kind of odd to think about the railroad business providing such great returns to investors, but that’s what they’ve been doing. The old economy strikes again. 

Union Pacific Corporation (UNP) just bounced off a record-high (again) on the stock market and the company reports April 17. 

This company’s earnings are material, even if you have no interest whatsoever in the business of freight by rail. For the most part, Wall Street estimates have been going up for the company, for this year and next. 

I don’t see the U.S. economy coming apart without some sign from Union Pacific. The company’s declining shipments of coal have been usurped by solid growth in oil railcars, construction materials, and automobiles. 

If you’re inclined, check out the statistical data released by the Association of American Railroads (www.aar.org); it’s a treasure trove of economic conditions related to goods transported by rail and more useful than a lot of other data or commentary. 

According to the association, for the first three months of 2014, U.S. railroads had cumulative volume of 3,301,422 carloads, up 0.4% over the first quarter of last year, and 2,937,811 intermodal units, up three percent comparatively. 

Total combined U.S. traffic for the first quarter of 2014 was 6,239,233 carloads and intermodal units, for a gain of 1.6% over last year. 

Now it’s not too difficult these days to find statistics to support any case. For investors, what corporations report is key. 

I think the railroads are poised to deliver another solid quarterly performance. Union Pacific has defied the rest of the stock market and the position is up another 20% over the last six months. The company’s five-year chart is featured below: 

 

Chart courtesy of www.StockCharts.com 

As mentioned, what this company reports is materially useful for your own market view. If Union Pacific was to miss consensus substantially and surprise with a softening in its freight business, then that’s a big signal that economic conditions are in trouble. 

Generally speaking, the company is good with its guidance and surprises are uncommon. 

You can garner a lot of insight by reading a railroad company’s SEC quarterly and annual statements. These documents offer much more in-depth analysis over an earnings press release. 

In Union Pacific’s latest annual report (or Form 10-K), the company describes in detail its financial performance for each of its units, share repurchase activity, and dividend policy. 

The company increased its share repurchases some 50% over 2012 and dividends grew 19%, which is pretty exceptional for any large-cap. 

Notable in the report were the company’s pricing gains. Union Pacific has been able to increase its prices without affecting demand. Higher average revenues per car resulted in an all-time record (low) operating ratio for the company. This is the industry’s benchmark, representing costs as a percentage of revenues. 

Union Pacific is a yardstick, and it’s worth following as a research tool regarding general economic activity. (See “Stocks the Broader Market Can’t Move Without.”) 

With the stock right at its high, I wouldn’t consider it until there was a major price retrenchment. 

This article Old Economy Strikes Again: Why Investors Need to Keep a Close Eye on This Rail Stock was originally posted at Profit Confidential