And the Academy Award for outstanding corporate earnings in an old-world industry goes to…Union Pacific Corporation (NYSE/UNP), the largest U.S. railroad by market capitalization. In what is a positive sign for the U.S. economy, Union Pacific’s earnings blasted past Wall Street’s consensus on higher cargo volumes and higher prices. The company’s fourth-quarter earnings grew 24% over the same quarter last year, despite a huge increase in the cost of fuel. Revenues grew 16% to $5.1 billion and the company expects steady growth throughout 2012. It’s no wonder the company’s shares are hitting new highs on the stock market.
These are excellent corporate earnings from a very mature industry and it’s a strong signal that the industrial economy in the U.S. is in a solid recovery. The stock market’s been pretty keen on Union Pacific for the last six years. Despite a major pullback in its share price during the subprime mortgage crisis (like most other stocks), Union Pacific’s share price appreciated from around $30.00 a share in 2005 to its current all-time record of over $114.00 per share (adjusting for a stock market split).
Corporate earnings have been so strong in the railroad industry; railroad stocks have handedly beat traditional higher growth companies like Intel Corporation (NASDAQ/INTC) and Oracle Corporation (NASDAQ/ORCL). (See Record Results & Good Visibility for Railroad Companies, But Nobody’s Buying the Success.) A lot of brand-name companies like Intel and Oracle haven’t done anything on the stock market for the last 11 years. There’s no need to even consider pure-play technology when companies like McDonald’s Corporation (NYSE/MCD) and Union Pacific are doing so well. As I keep writing, what’s old is new again and the corporate earnings are robust enough in “old names” to support a rising stock market.
I’d own a railroad stock in a long-term equity portfolio, but I’d wait until there was a price retreat before initiating a new position. The biggest issue affecting railroad corporate earnings is fuel costs and this is why Union Pacific’s earnings were so impressive. Last quarter’s fuel costs increased by close to 40%, yet the company was still able to grow its earnings an impressive 24%. And the best sign (for Union Pacific and the economy) is the company’s ability to increase its prices without affecting demand. This means there’s underlying strength within the industry.
The stock market has been kind to railroad stocks over the last five years because of their strong corporate earnings. It’s no wonder Warren Buffett wanted to purchase all of Burlington Northern Santa Fe Railway. It’s a great business to be in once you’ve got your infrastructure built and paid for.
I wouldn’t be surprised if the railroads return more of their corporate earnings to shareholders this year. As a group, they are due for increased dividends. If this happens, then the stock market’s interest in the sector will continue. In this kind of market, it pays to stick with your winners.