Will this Railroad Raise the Bar for the Industry?

Johnny Cash once said about the train near Folsom State Prison, "When I hear that whistle blowin', I hang my head and cry." When the largest U.S. railroad delivers earnings results on Thursday, shareholders are hoping for a more positive reaction.

Union Pacific (NYSE: UNP  ) will unveil fourth-quarter and year-end results before the market opens on Thursday. In doing so, the major West Coast hauler could set the tone for the rest of the railroad industry this earnings season. Here's a sneak peek for investors leading up to the call.

The recent past
For Union Pacific, whose railroads crisscross the western two-thirds of the United States, performance over the past two quarters has been strong. The railroad sector depends on the broader economy to boost demand for freight, and lately the economy's been chugging along at a decent clip.

Union Pacific beat analysts' earnings estimates in the second and third quarters of 2011, and competitors followed suit. Operators in other regions of the country, including CSX (NYSE: CSX  ) , Norfolk Southern (NYSE: NSC  ) , and Kansas City Southern (NYSE: KSU  ) , all matched or topped analysts' forecasted earnings during the last two quarters.

What to expect in revenue
For the final quarter of 2011, analysts' average prediction for revenue stands at $5.05 billion, and $19.49 billion for the year. These figures represent top-line growth of 15% on a quarterly comparison and 14.9% on an annual basis.

How do we assign merit to these forecasts? For starters, we can dig a little deeper using the rail volume metrics posted weekly by the American Association of Railroads. The fourth-quarter figures for Union Pacific thus far reflect a year-over-year increase of 7% in total carloads, which contain goods like coal, grain, and other heavy materials. Shipments of intermodal containers, which often contain consumer goods that require greater transport flexibility, dropped 2% from last year at this time. In total, the combined carloads and intermodal containers shipments increased 4%. This overall figure reflects steady volume growth that should drive revenue higher in the fourth quarter.

What to expect in earnings
Heading into the earnings announcement, the average analyst estimate calls for profit of $1.82 per share from Union Pacific, an increase of 17% from quarterly earnings a year ago. For the full year, analysts are predicting earnings of $6.55 per share, which would imply year-over-year growth of 18.44%.

In an age-old industry, such strong earnings growth would seem rare, but these operators are at the top of their game. For starters, solid revenue performance accounts for a portion of the earnings growth. At the end of 2010, Union Pacific's top line grew more than 19%. However, an even more significant driving factor has been the railroads' ability to maintain low costs after emerging from the recent recession. Forced to reduce overhead during the downturn, the railroads re-emerged leaner and were able to ramp up volume while adding only minimally to the cost structure. The result is expanding profit margins and a boost in shareholder returns.

With that in mind, let's take a look at how the railroads have performed for shareholders over the past two-and-a-half years.

Union Pacific Corporation Stock Chart by YCharts

It wouldn't be a stretch to say that every operator has left the broader S&P 500 index in the dust. Since we emerged from the recession, the average return for the railroads clocked in at 159% versus a 41% return for the S&P 500.

Foolish takeaway
The railroads often serve as a bellwether for the larger economy, so investors will want to pay close attention to Union Pacific's outlook on Thursday. Increasing volume for the railroads indicates growing demand for all types of goods.

Likewise, another company that typically rises and falls with the broader economy is General Electric (NYSE: GE  ) . As the largest conglomerate in the world, GE's earnings can serve as a leading indicator for the health of the economy. GE's stock has been on a tear over the past six weeks, climbing 17% since the beginning of December. If it delivers solid earnings on Friday, that could bode well for the overall market.

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