Union Pacific Corp , the No. 1 U.S. railroad, reported quarterly profit and revenue that beat analyst forecasts on rising volume.

“As we look ahead to 2011, we are encouraged by signs of a slowly strengthening economy,” said Chief Executive Jim Young.

Volume growth, increased fuel cost recovery and core pricing gains boosted fourth-quarter 2010 earnings, the company said, reporting the most profitable year in its 150-year history.

Union Pacific stopped giving profit forecasts two years ago, which “may frustrate the outside world a little bit,” Young said in an interview.

The lack of a specific profit forecast 2011, and difficulty matching the types of gains posted over the past year, are driving profit-taking, said BB&T Capital Markets analyst John Mims.

Net income rose 41 percent to $775 million, or $1.56 a share, in the fourth quarter from $549 million, or $1.08 per share a year before. Analysts, on average, had expected profit of $1.48 per share, according to Thomson Reuters I/B/E/S.

Quarterly operating revenue rose 17 percent to $4.4 billion, topping analyst forecasts of $4.35 billion.

“Operationally this was a solid report, but it wasn’t really much better than was discounted into consensus. Most of the beat was tax rate,” said Peter Nesvold, an analyst at Jefferies & Co.

The Omaha, Nebraska-based company said its effective tax rate fell in the quarter to 34.3 percent from 36.8 percent a year earlier.

Still: “If they can sustain price increases in the 4 to 5 percent range, net of fuel, that should continue the upside to expectations as we progress through 2011,” Nesvold said.

Union Pacific said its diesel fuel costs jumped almost 20 percent in the quarter from a year before, costing $111 million.

Pricing Legacy
About 12 percent of Union Pacific’s revenue comes from long-term contracts, mainly in coal and intermodal, that mostly come due by 2015 and are seen being renewed at sharply higher prices.

“Legacy” contracts representing about 4 percent of revenues will likely be repriced late this year, Young said.

“I have business today that we’re hauling, losing money on every carload,” he said. “We have got to get the financial returns on some of that business up or we won’t handle it.”

Union Pacific plans its largest-ever annual capital spending this year, at $3.2 billion, with expectations of improved financial results and a commitment to expand its network to handle its growing volumes.

Fourth-quarter business volumes, measured by total revenue carloads, grew 9 percent as all six of the company’s business groups had volume growth for the third straight quarter.

“At times like these when everything is running on all cylinders, we tend to lessen risk and take some money off of the table,” said Alan Lancz, president of Alan B. Lancz Inc. “We still think it’s a great company as a core holding,” but have shed some shares of Union Pacific and other cyclical stocks into this year’s rally, he said. (Reuters)