I’d like to report on a benchmark stock that I consider an important market indicator for the U.S. economy. I’ve written about Union Pacific Corporation (NYSE/UNP) many times as a company to follow and its first-quarter numbers were just plain excellent. This company has been a real leader on the stock market and the stock still isn’t expensively priced. In my view, the continued strength in the railroad industry is a positive indicator regarding the health of the industrial U.S. economy.
The company’s 2012 first-quarter revenues grew 14% to $5.11 billion, up solidly over the first quarter of 2011. Earnings, however, improved a healthy 39% on a per share basis to $863 million, or $1.79. This earnings growth is particularly impressive considering the company’s average cost for diesel fuel grew 12% to $3.23 a gallon during the quarter.
Union Pacific reported that four out of its six business groups generated solid volume growth during the quarter. The company’s automotive freight revenues did the best growing 26%. Industrial products were up 25%, while chemicals grew 16% and intermodal grew 15%. Slower freight revenue growth occurred in agriculture shipments and energy products, at six percent and five percent, respectively.
As I expected, the company’s coal shipments were a bit soft. (See My Favorite Benchmark Stocks That Lead the Stock Market.) With natural gas prices extremely low, power plants don’t need to burn as much coal to generate electricity. This past winter was also unusually warm. During the first quarter, Union Pacific bought back 3.9 million of its own common shares at an average price of $110.64 per share, spending a total of $433 million. The company also continued to pay its $0.60 dividend, which it began in the previous quarter. Prior to that, the company was paying out $0.475 per share.
CSX Corporation (NYSE/CSX) also beat expectations on both revenues and earnings during the first quarter and signaled that the U.S. economy is slowly improving. Looking at shipment volumes as well as prices, I see the railroad industry as one that’s very healthy. Company managements are mostly saying the same thing—they expect increased shipment volumes throughout the year and that the U.S. economy, while not robust, is growing.
So, we are still getting good news from the industrial U.S. economy. However, I want to repeat my view that the stock market is due for a correction. The stock market isn’t overpriced and that’s good, but there is a lot of good news built into current share prices. Corporate earnings have been very solid, but not outstanding. If the stock market is to break out above its recent high, then we need strong outperformance in terms of economic news and corporate earnings.
Many of the stock market’s large-cap leaders have been breaking down technically. The U.S. economy is showing strength in specific sectors, but the stock market to me just looks tired. It has, after all, come a long way in just four months. Data on the U.S. economy are likely to keep improving modestly, but a stock market pullback is now likely.