The mid-‘10’s might ostensibly be the age of the “information economy,” but tangible goods aren’t going anywhere anytime soon. Actually, check that: they’re going plenty of places. For instance, lumber, from Oregon to Los Angeles. Or cars, from Mexico to Chicago. Or thousands of other consumer goods and raw materials, both perishable and non, across more than 32,000 miles of railroad. If you live in the western two-thirds of North America, Union Pacific Corp. (UNP) has almost certainly had a hand in shipping many if not most of the things that ended up in your possession.
The largest railroad in the United States, Union Pacific ships freight to and through all the contiguous states west of the Mississippi excluding the Dakotas. Founded in Omaha, Neb., during the Civil War, the $105.1 billion corporation is still headquartered there. Union Pacific was the first transcontinental carrier: the famous Golden Spike in Utah, where westbound track from Iowa met eastbound track from San Francisco, is on the Union Pacific line. Today, after repeated acquisitions (most notably of Southern Pacific, along with that of several smaller regional lines), Union Pacific’s reach is greater than that of any freight railroad on the planet. (For more, see: A Primer on the Railroad Sector.)
Not Beholden to One Industry
One of the ingenious attributes of the Union Pacific business model is that it isn’t beholden to a few suppliers. Or even to a few industries. The company’s largest customers are, like most of the other 10,000 on its roster, business-to-business. The dominant players include American President Lines, a Singapore-based shipping company that transports containers across the Pacific and to points west; and XPO Logistics (XPO) (formerly Pacer International), an intermodal transportation company (e.g. trucking, warehousing.)
That intermodal business makes up a significant chunk Union Pacific’s revenue, $3.8 billion in freight revenue in 2017, which contributed to total freight revenue of $19.8 billion – comes from intermodal customers, who ship other businesses’ products to and from Union Pacific cars. Which means containers, trailers, and truckloads, diverse in both content and destination, taken to Union Pacific loading facilities and transported in a way that remains more cost-effective than any other. (For related reading, see: How To Analyze the Transportation Industry.)
Meanwhile, 13% of Union Pacific revenue comes from a vanishingly inexpensive product, one that sells wholesale for less than 3¢ a pound (although it’s almost always quoted per ton).
Coal a Heavyweight
That’d be coal. Black, sooty, life-sustaining coal (and petroleum coke), excavated from the Powder River Basin of Wyoming and shipped to the eastern United States, Europe and Asia. At around $31.8 a ton (coal prices fluctuate more than you might think), annual volume on Union Pacific rolling stock thus reaches into the hundreds of billions of tons. Coal is almost as inexpensive to transport as it is to buy – it doesn’t require refrigerated cars, or even a roof – and thus remains a huge profit center for Union Pacific. (For more, see: Why Coal Deserves Your Attention Right Now.)
20% of company revenue falls under the catch-all category “industrial products,” which covers building materials and finished goods, among others. For every truck you see driving down the highway, moving stone, steel, pipe, paper, or even appliances, understand that that represents a microscopic piece of what was off-loaded from a Union Pacific train.
Petrochem Goldmine on the Gulf
The greatest concentration of Union Pacific track is along the Gulf Coast. From Brownsville, Texas, to New Orleans, the railroad serves the chemical producers that account for 17% of company revenue. Chemical shipments are predominantly alkenes and aromatics, fertilizer, and soda ash. Greatly simplifying matters, plants in Texas and Louisiana create the chemicals that Union Pacific then ships to agricultural users in the Midwest and in the San Joaquin Valley. Sodium carbonate, used in foodstuff production, cleaning agent production and brick manufacturing, finds its way from California and the Intermountain West to those same places that produce chemicals. Factor in the transportation of petroleum and related products, and you can understand how large the chemical business is to Union Pacific. (For a look back, see: Union Pacific Already Rewarded for its Quality.)
Food and Cars, Too
Narrowly behind chemicals is agricultural products – primarily grains, which originate in the Upper Midwest and find their way to the Gulf, the Pacific Northwest, and Mexico. Union Pacific also carries finished foods and beverages suitable for retailing, but more than one-third of its agricultural shipments are “unit trains” that transport a single food commodity – soybeans, wheat, etc. – directly from the producer, either to market or to a terminal for export.
Considerably more expensive per ton than coal are automobiles. Which, contrary to popular observation, are not shipped directly from Detroit, 9 at a time on Peterbilt haulers. Rather, many of those cars make it from the assembly line to one of Union Pacific’s 40 distribution centers built specifically to transport autos. From there they’re distributed to various locales in the western United States, and only then are they driven onto the haulers for the last few miles to the dealerships. Automotive operations accounted for 10% of Union Pacific’s revenue last year. (For related reading, see: How Warren Buffett Made Berkshire Hathaway a World-Beater.)
The Bottom Line
The heyday of most Industrial Revolution innovations came and went a long time ago. But if you need to ship titanic volumes of sundry products, across sweeping distances, nothing anyone’s invented in the last 150 years can beat rail. Every day, 8,300 Union Pacific locomotives couple with 68,000 cars to handle freight across 2.5 million square miles of America. Union Pacific got in early, and with practically insurmountable barriers to entry (no upstart company is going to start laying thousands of miles of track anytime soon), the company will remain a large and indispensable one for decades to come. (For related reading, see: Wall Street History: Railroads and Rockefeller.)