Union Pacific Corp.’s (UNP) first-quarter earnings of $1.01 per share were ahead of the Zacks Consensus Estimate of 95 cents. This also compares favorably with earnings of 72 cents in the prior-year quarter.

The results for the reported quarter primarily benefited from increased operating revenues due to growth in business volumes. Stable Customer Satisfaction Index, core pricing gains and strong cash from operations were also among the positives. However, higher operating expenses, primarily as a result of increased fuel costs and depreciation, were the downside.

Total operating revenues for the reported quarter increased 16% year-over-year to $4.0 billion. This reflected a jump in revenue carloads of 13%, while average revenue per car increased 3%.

Freight revenues showed improvement over the prior-year quarter in all six business groups. During the reported quarter, freight revenues increased 16% year-over-year to $3.8 billion.

Union Pacific’s freight revenues from its Automotive operation increased a record 88% year-over-year to $305 million. Other major improvements were in Intermodal (25% year-over-year) and Chemicals (14% year-over-year).

Despite Union Pacific’s efforts to curtail costs, operating expenses increased 8% year-over-year in the reported quarter, due primarily to a 51% increase in fuel costs to $583 million, largely related to higher oil prices as well as an 8% increase in depreciation.

As a result of strong volume growth, ongoing efficiency initiatives and pricing gains, the operating ratio improved to 75.1% from 80.4% in the prior-year quarter. Union Pacific’s Customer Satisfaction Index for the reported quarter was at par with the prior-year quarter at 87.

Average diesel fuel price in the reported quarter increased 43% to $2.16 per gallon from $1.51 in the prior-year quarter.

Since 2009, Union Pacific management no longer provides earnings guidance. However, management foresees better growth opportunities in 2010. Union Pacific plans to remain flexible and operate a safe, efficient network to significantly leverage business volume.

Earlier this week, Standard & Poor’s Ratings Services affirmed Union Pacific’s long-term corporate credit rating at BBB and raised the outlook to positive from stable. The outlook raise reflects the company’s volume recovery and improved operating performance. Given the continuing economic recovery and Union Pacific’s diverse mix of traffic, the rating agency expects volumes to continue to improve.

We expect the company’s top line to benefit from strong pricing with the gradual recovery of the economy. Cost containment measures, along with the initiatives to improve operating efficiency, also augur well. However, expected wage inflation and increasing depreciation expense are expected to drag future profitability.

Last week, peer CSX Corporation (CSX) reported a heartening first quarter profit. CSX Corporation’s first quarter earnings of 78 cents per share were ahead of the Zacks Consensus Estimate of 69 cents. Earnings were up 22% from 64 cents in the year-ago quarter.

Results were aided by increased revenues due to volume improvement in chemicals, agricultural products, metals, fertilizers and automotives in the wake of the improving economy. We think the solid results of Union Pacific and CSX Corporation augur well for the rest of the industry.
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