Union Pacific Corp. lost ground to Warren Buffett’s BNSF Railway Co. for a third year as the nation’s two largest railroads battled for western U.S. cargo. Shares fell the most in more than a year.
While Union Pacific reversed a two-year decline in carloads, its 1.7 percent growth rate in the fourth quarter trailed BNSF’s 5.5 percent. The pitched battle for freight has throttled Union Pacific’s ability to raise freight rates, a key lever for boosting revenue and improving efficiency.
Chief Executive Officer Lance Fritz said Thursday he won’t get into a pricing war with rival railroads. Decisions to pursue cargo are “based on whether or not we can generate an attractive return that allows us to reinvest in the railroad,” he said. “We don’t pursue volume for volume’s sake.”
Shares fell 5.4 percent to $133.63 at 12:07 p.m. in New York and earlier were down as much as 6.6 percent, the biggest intraday decline since October 2016.
Freight prices climbed 1.75 percent in the fourth quarter, Union Pacific said in a statement Thursday, compared with increases of 3.5 percent to 4 percent in 2015. The biggest pricing pressure is on coal and containerized cargoes, known as intermodal. Excluding those shipments, pricing would have risen 2.75 percent, the company said.
The railroad ended 2017 with a record-low 63 percent operating ratio, a widely watched measure of productivity that compares expenses to sales and for which a lower number is better. Union Pacific aims to drop the ratio as low as 60 percent by 2019, and that goal is still achievable, Fritz said during a conference call with analysts. The previous low was 63.1 percent in 2015.
The railroad will get a hand from the reduction of the corporate tax rate to 21 percent from 35 percent. Union Pacific, which doesn’t have operations overseas to mitigate its tax bill, had an effective rate of 37.4 percent in 2016. The company logged a noncash benefit of about $6 billion in the fourth quarter because of the lower rate’s impact on deferred taxes.
With the cut, Union Pacific’s effective income tax rate will be about 25 percent this year, giving the company about $1 billion of extra cash.
Fourth-quarter adjusted earnings rose to $1.53 a share, a penny below analysts’ expectations based on the average of estimates compiled by Bloomberg. Revenue rose 5.5 percent to $5.45 billion, compared with an average estimate of $5.43 billion.
The railroad struggled with service in the quarter as train speed declined 5.3 percent and the amount of time cars sit at rail yards increased 12 percent from a year ago. Fritz called the declining service metrics a ‘blip’ and not systemic. The implementation of positive train control, a technology mandated by Congress to remotely stop runaway trains, in large cities has hurt velocity.
Union Pacific expects carloads to expand in the low single digits through 2018. The company recorded $345 million in savings from productivity gains last year, which was slightly below the lower end of its goal, and expects another $300 million to $350 million this year.
Union Pacific plans capital spending of $3.3 billion this year, including purchases of 60 locomotives and 700 railcars. The company also said it’s building a $550 million rail yard in Texas that will begin operations in 2020. Last year, Union Pacific’s capital spending was $3.1 billion.
