Its debt surged to fund the share buybacks. And truckers ate its lunch. But don’t tell any of this to the “market.”
By Wolf Richter for WOLF STREET.
Original story at wolfstreet.com
The first thing to know about Union Pacific’s earnings, which it released this morning, is that despite cutting its workforce by 17%, promising more layoffs in 2020, experiencing a 9.5% drop in revenues and a 10% drop in net income in the fourth quarter, the company blew $600 million in Q4 and $5.8 billion in the year 2019 on buying back its own shares, which it funded with $3 billion in new debt.
This comes on top of the $8.3 billion in share buybacks in 2018. Since it started repurchasing its own shares in 2010, fired up by the Fed’s cheap-money policies, its cumulative share buybacks have reached $34.2 billion:
Freight recession & truckers sap revenues.
Union Pacific was not immune to the freight recession, which began in January 2019 and got worse, with December dishing up a decline in shipments, except commodities, by all modes of transportation of nearly 8% year-over-year, the worst episode since November 2009, during the Financial Crisis.
For Union Pacific, freight revenues in Q4 2019 dropped 10% year-over-year to $4.85 billion, and total revenues fell 9.5% to $5.2 billion. For the whole year, revenues fell 5% to $21.7 billion.
Revenues by category in Q4:
- Agricultural products -2% (to $1.1 billion)
- Energy (coal, oil): -25% (to $838 million); this is in line with the long-drawn out collapse of coal, both for domestic use and export.
- Industrial: flat ($1.4 billion) in line with the stagnating industrial economy.
- “Premium” (intermodal containers, trailers): -14% (to $1.5 billion) worse than the freight recession, and a sign that truckers, which are in the same business, have gotten more aggressive and are eating its lunch.
Expenses drop, due to layoffs and lower fuel costs
Operating expenses fell 12% in Q4 to $3.1 billion. Various expense items dropped, including fuel expenses, which plunged 20% on lower price-per-gallon of diesel fuel and less freight to haul. In terms of dollars, the drop in fuel expenses amounted to a savings of $128 million in Q4, bringing total fuel costs down to $512 million.
But the biggest line item was the 18% drop in compensation and benefits. In dollars, compensation and benefit expenses fell by $231 million in Q4 to $1.05 billion. How is this possible?
Slashing headcount by 25%
Over the 12 months between Q4 2018 and Q4 2019, Union Pacific axed 7,133 employees, or 17% of its workforce, bringing its headcount down to 34,563 employees in Q4.
In 2020, it plans to cut another 3,000 or so jobs. Which would mean that over the two-year period through Q4 2020, the company will have axed about 25% of its employees.
Throughout 2019, there has been a series of layoffs at rail yards across the country, a few hundred people here and a few hundred people there. When word would leak out that Union Pacific was laying off people at a local rail yard, local news media would reach out to the company and get the prepackaged statement that would always cite its “Unified Plan 2020” and would usually include something like this:
“Union Pacific continues streamlining operations as part of our Unified Plan 2020 operating plan.” Then it would address the specific locations of the layoffs that the media outlet had inquired about, how those operations were being transferred to somewhere else, or were being consolidated into something else.
And it would add something like this: “These changes will improve operating efficiencies, helping us provide customers with safe and reliable rail service.”
Or something like this: “These steps are part of Unified Plan 2020, which streamlines operations as we ensure Union Pacific remains a strong and competitive company.”
This Unified Plan 2020, which the railroad announced in September 2018, is about how the railroad is restructuring its operations to run fewer trains, but with more cars, and bring up the average velocity, and have them “dwell” less time at the terminal, etc. “Precision-Scheduled Railroading,” as it’s called.
“The service design is reducing work that doesn’t need to occur and that’s eliminating jobs,” Union Pacific CEO Lance Fritz told the Wall Street Journal in an interview today.
The risk is that lousy railroad service is driving shippers “off the railroad and on to trucking,” a fear that CSX expressed when it discussed its operational restructuring, its revenue decline, and its workforce reductions.
And Union Pacific’s 14% decline in revenues in its “Premium” segment (intermodal containers and trailers) where it competes directly with truckers shows that some of its business has already been driven off the railroad and on to the highway.
But it wasn’t enough, and income fell.
Despite Unified Plan 2020, and despite chopping 17% of its employees, and despite lower fuel costs, and lower other expenses, it wasn’t quite enough to overcome the 9% drop in revenues. And operating income fell by 5% to $2.1 billion.
But then, the company added $3 billion in new long-term debt to fund its $5.8 billion in share buybacks, bringing its total long-term debt to $24 billion, and despite lower interest rates, its interest expense (which is not included in operating expenses) jumped by 16% in Q4, to $278 million, and by 21% for the year, to $1.05 billion.
And its net income fell by 10% to $1.4 billion in Q4. For the year, net income ticked down 1% to $5.9 billion. Which is roughly the same amount it blew on share buybacks ($5.8 billion).
For stocks, reality is irrelevant.
But “the market,” this mix of humans and algos, doesn’t actually care about reality, about dropping revenues, dropping income, layoffs, and about driving business from the railroad on to the highway. All it cares about is share buybacks and the illusion that share prices will rise forever. So today, ladies and gentlemen, the shares of Union Pacific [UNP] rose to a new high.
And despite the fact that this is a shrinking company with shrinking revenues, shrinking workforce, shrinking business, and shrinking income, its PE ratio rose to 22. This type of lofty PE ratio used to be reserved for companies with surging sales and profits. Now it’s reserved for shrinking companies with shrinking profits, which tells you what condition this market is in.