April 26, 2018 / 12:13 PM / a year ago

Union Pacific warns on operating ratio, shares slip

(Reuters) - Union Pacific Corp (UNP.N) warned on Thursday it was unlikely to achieve its targets for a key efficiency measure by 2019 due to congestion on its rail network, knocking down shares of the No. 1 U.S. railroad by as much as 7 percent.

The warning on the railroad’s operating ratio, a measure of operating expenses as a percentage of revenue and a key metric for Wall Street, overshadowed the Omaha, Nebraska-based company’s better-than-expected profit and erased early share gains.

Shares were down 2.8 percent in afternoon trade.

A lower operating ratio means better efficiency. In the first quarter, Union Pacific reported an operating ratio of 64.6 percent, compared with 65.2 percent from a year ago.

But Chief Financial Officer Robert Knight said on a post-earnings call with analysts the railroad was unlikely to achieve an operating ratio of 60 percent given service problems and congestion on its network, which spans the western half of the United States.

Union Pacific, Norfolk Southern Corp (NSC.N) and other top U.S. railroads are facing scrutiny from the nation’s top federal rail regulator over persistent service complaints.

Chief Executive Lance Fritz said in an interview the railroad was working to streamline operations and said strong volumes and other cargo coupled with higher freight rates would drive efficiency.

“We feel good about our ability to take advantage of the tighter truck market and continue to win really attractive business in the domestic (consumer goods) space,” Fritz said.

Union Pacific, Norfolk Southern and other railroads have benefited from one of the tightest trucking markets in years, which has caused shippers to transfer freight to rail to find capacity and cheaper prices, despite complaints over service delays and rail car shortages.

“Although the market is taking the announcement negatively, with the stronger volumes that Union Pacific is seeing, the company is essentially focusing more on growth and bettering its service,” Edward Jones analyst Dan Sherman said.

Overall freight revenue rose 6.8 percent in the first quarter, led by a 14.6 percent jump from its energy segment, the company said.

Overall volumes, as measured by total revenue carloads, increased 1.8 percent in the quarter, compared with a year earlier.

Net income rose to $1.31 billion, or $1.68 per share, in the latest quarter from $1.07 billion, or $1.32 per share, a year earlier.

Total operating revenue rose 6.7 percent to $5.48 billion.

Analysts on average had expected profit of $1.66 per share, according to Thomson Reuters I/B/E/S.

Reporting by Sanjana Shivdas and Eric M. Johnson in New York; Editing by Anil D'Silva, Shailesh Kuber and Richard Chang

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