Union Pacific railroad steamed past challenges presented by severe flooding in the Midwest as well as soaring fuel costs to generate 10 percent more second-quarter profit, the company said Thursday.
Surprised investors pushed shares of the railroad from Omaha up nearly 5 percent in afternoon trading.
Price increases and an 11 percent jump in the number of carloads of chemicals and agricultural products the railroad carried helped it generate $785 million net income, or $1.59 per share, in the quarter. That's up from $711 million net income, or $1.40 per share, last year.
Union Pacific incurred flood-related expenses of about $14 million in the quarter and lost about $20 million of coal revenue because of flooding. Those things cost the railroad about 4 cents per share of profit.
The railroad said revenue grew 16 percent to $4.86 billion over last year's $4.18 billion.
Analysts surveyed by FactSet expected Union Pacific to report net income of $1.58 per share on revenue of $4.74 billion.
Union Pacific Chairman and CEO Jim Young said he's optimistic about the second half of the year because the railroad should be able to increase prices on some contracts and shipping volumes are likely to rise even with the economic uncertainties.
Young said even with the lingering questions about the U.S. debt dilemma and slow economic growth he's counting on several factors to boost volume in the fall: farmers will still harvest a crop, the current heat will drive demand for coal, automotive shipments should improve as Japanese companies rebound from the tsunami and Christmas will still come.
Higher corn prices led farmers to plant the second biggest corn crop this year since World War II. The U.S. Agriculture Department estimated earlier this month that 880 million bushels of corn will be left over when the harvest begins in the fall. That's an increase from the previous estimate of 730 million bushels.
"I'm pretty confident you're going to see stronger volumes here second half," Young said.
But consumer demand remains a big question mark because of the slow economic growth and ongoing debate about the U.S. debt limit, Young said.
"Anything related to consumer demand is still a little weaker than expected," he said.
As long as some economic growth materializes, the railroad plans to hire about 4,500 people by the end of 2011. Most of that hiring will replace retiring workers, but there would finish the year with about 1,500 more workers than at the end of 2010.
Currently, about 250 Union Pacific workers remain on furlough, but that is down from a peak of about 5,200 in the spring of 2009 during the recession.
Standard & Poors analyst Kevin Kirkeby said in a research note that even though Union Pacific's price gains offset the higher costs in the second quarter he believes the rising labor and maintenance costs will limit profits. Kirkeby recommends that investors "Hold" their Union Pacific stock.
Union Pacific said overall shipping volume grew 3 percent in the quarter with the biggest increases coming in its chemical and agricultural businesses. But volume was up in all of its businesses except intermodal shipping where the railroad moves containers taken off ships and trucks.
Most of the growth in agricultural shipping volume was related to increases in wheat and feed grain exports over last year's relatively weak volumes. Ethanol shipments continued to grow, and Union Pacific saw a 28 percent jump in imported beer shipments.
The railroad said diesel fuel costs increased 44 percent to an average of $3.29 per gallon from last year's $2.29. It spent $904 million on fuel in the quarter. Union Pacific said net fuel costs hurt earnings by about 2 cents per share after its fuel surcharges are accounted for.
Union Pacific's results are watched closely, because the major freight railroads are considered gauges of the nation's economic health. Railroads carry cars, chemicals, crops, containers of imported goods and lumber across the nation, so railroad profits are tied to the health of those industries.
Through the first half of 2009, Union Pacific has generated $1.4 billion net income, or $2.89 per share, on revenue of $9.3 billion. That's up from last year's $1.2 billion net income, or $2.42 per share, on $8.1 billion revenue.
Union Pacific's stock gained $4.17 to sell for $104 in midday trading Thursday.
Union Pacific is the nation's largest railroad. It operates 32,400 miles of track in 23 states from the Midwest to the West and Gulf coasts.
Union Pacific Corp.: www.up.com