Railroads have little to fear from falling oil prices judging by Union Pacific’s (NYSE: UNP) latest financial numbers. The UP did just fine in the fourth quarter of 2014 despite the collapse in oil prices.
The Union Pacific reported a TTM revenue of $23.99 billion on Dec. 31, 2014, an increase of $2.03 billion over December 2013, when it reported a TTM revenue of $21.96 billion. That occurred despite a 48% fall in oil prices in 2014 driving oil prices down to $50 a barrel on Jan. 5 for the first time since April 2009.
The UP also reported a year to year quarterly revenue growth rate of 9.29% on Dec. 2014 and a profit margin of 23.26% on Dec. 31, 2014, not to mention a return on equity of 24.28%.
From a value investor’s standpoint, the railroad also reported a free cash flow of $5.253 billion and a net income of $5.18 billion on Dec. 31. Running a railroad certainly pays these days—even as oil prices keep falling—as the numbers of other railroads that reported on that date prove.
The CSX (NYSE: CSX) reported a TTM revenue of $12.67 billion on Dec. 31, 2014, up from $12.03 billion on Dec. 31, 2013. CSX also reported a quarterly year to year revenue growth rate of 5.28% and a profit margin of 15.38% on the same day. It also generated a net income of $1.927 billion and a free cash flow of $149 million. That gave investors a return on equity of 17.75%.
Canadian Railroads Not Impacted Yet
Some investors might be wondering about Canadian railroads, which are more exposed to oil than their American counterparts. Well, the one Canadian railroad that reported on Dec. 31, 2014, did pretty well.
The Canadian Pacific Railway (NYSE: CP), reported a TTM revenue of $5.99 billion on Dec. 31, 2014, up slightly from $5.956 billion in December 2013. Interestingly enough, the CP also reported a year to year quarterly revenue growth figure of 1.19% and a profit margin of 25.62% on the same day. The Canadian Pacific also reported a net income of $1.33 billion and a free cash flow of $123.29 million. This provided investors with a very impressive return on equity of 21.58%. The Canadian National Railway (NYSE: CNI) last reported on Sept. 30, 2014, so we will not include it in our little roundup.
This survey shows that railroads are not as exposed to oil as we might think. It is worth noting here that the U.S. railway with the most oil exposure, the Burlington Northern Santa Fe, or BNSF, is now part of Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A) empire, so it no longer reports separate financials.
So what’s going on here? The conventional wisdom over the past couple of years is that the railroads have been doing well because of a reliance on Bakken Crude and the oil business. The shipment of crude oil and materials for drilling only makes up around 4.5% of the UP’s total business.
These figures show that conventional wisdom is wrong; the railroads are doing well for a host of reasons, of which the oil boom is only one. My guess is that growth in other segments of the economy, such as auto sales, are making up for the decline in oil revenue. U.S. auto sales rose 11% in December and could reach 16.7 million in 2015, according to Autodata and Reuters.
Growth in other areas of the economy fueled by low gas prices and the fall in diesel fuel prices is making up for the loss of oil revenue. There is also a strong possibility that oil shipments have not yet been cut. UP reported a 7% increase in crude oil shipment revenue in the fourth quarter, and the CP reported a 20% increase in crude oil shipment revenue in the fourth quarter, according to The Wall Street Journal.
I might also note that it could take several months or longer for serious oil production cuts to kick in. It might take a few more months for the effect of that to hit the oil companies.
This could be made up by increases in other areas; the Canadian Pacific reported 27% increase in U.S. grain shipment revenue in the fourth quarter. The UP reported that coal shipments grew by 9% and industrial products shipments grew by 10%.
The CP could be affected if low oil prices dampen the Canadian economy. Some Canadian economists are expecting a downturn this year because of falling oil prices early this year.
Oil does not seem to be as important to the railroads as we were led to believe. The real problems facing this sector could be labor relations, congestion at the West Coast container ports and congestion on the rails themselves. Those problems could pose greater threats to this sector than the oil price collapse.