AI Can Replace the Average Earnings Results Research Report

Author

Andrew Meister
October 25, 2023

It’s earnings time or what my wife and kids know as “Dad’s busy period.” They know that means: Daddy can do nothing except tuck them in bed, maybe cook dinner, eat with them and maybe take them to school.

I’m an equity research analyst and 4 times a year the companies I cover report earnings. So it is currently busy period.

I cover some 30 companies extremely closely. I follow another 20 kind of closely, and another 10 companies monitor as best I can.

I’m posting to tell you what I do once each one of the 30 companies I follow closely reports earnings.

1) I listen to the conference call and type notes (1 hour). One hour is the industry standard length of conference calls.

2) I update the model, with meticulous cell notes, and work on the forward estimates with the why these estimates make sense. (4 hours)

3) I write-up my findings in an Internal Research Note and hit send to distribute my thoughts to the whole team. (1 hour)

So that is 6 hours. The fastest I can turnaround an insightful note and quality model update on a quarter is 4 hours. That’s me, if you’re faster kudos to you. Based on my experience, adding alpha takes time.

Now if AI could help shorten the time of steps 1, 2, and 3 that would be a “Wow” moment wouldn’t it.

Take for instance the UNP 3Q 2023 earnings call. The following was summarized by a machine:

AI starts here:

For the 3Q 2023, Union Pacific (UNP) reported the following operating metrics:

  • Net income of $1.5 billion or $2.51 per share, compared to 2022 third quarter net income of $1.9 billion or $3.05 per share.

  • Operating revenue declined 10%, reflecting lower fuel surcharge revenue, reduced volumes, and decreased other revenue.

  • Operating ratio of 63.4% due to an ongoing mismatch in the cost structure, inflation pressure from new labor agreements, and higher casualty costs.

  • Fuel expense in the quarter decreased 25% on a 21% decrease in fuel prices from $3.96 a gallon to $3.12.

  • Year-to-date, cash from operations totaled $6 billion, a decrease of roughly $1 billion from 2022.

  • Workforce productivity was down 6% versus last year, reflecting the impact of volume declines, coupled with increased workforce levels.

  • Train length improved 1% compared to third quarter 2022, despite lower volumes in the Intermodal business.

Key operating metrics:

  • Gross ton-miles (GTMs) (billions): 208.7

  • Revenue ton-miles (billions): 103.0

  • Freight car velocity (daily miles per car): 200

  • Average train speed (miles per hour): 23.6

  • Average terminal dwell time (hours): 23.5

  • Locomotive productivity (GTMs per horsepower day): 129

  • Train length (feet): 9,537

  • Intermodal car trip plan compliance (%): 75

  • Manifest/Automotive car trip plan compliance (%): 64

  • Workforce productivity (car miles per employee): 985

  • Total employees (average): 31,624

Here are the highlights from the Union Pacific (UNP) 3Q 2023 earnings call:

  • Union Pacific reported 2023 third quarter net income of $1.5 billion or $2.51 per share, compared to 2022 third quarter net income of $1.9 billion or $3.05 per share.

  • The third quarter operating revenue declined 10%, reflecting lower fuel surcharge revenue, reduced volumes, and decreased other revenue.

  • Expenses were also lower year-over-year driven by fuel expense and last year's one-time charge for labor agreement.

  • The operating ratio was 63.4% due to an ongoing mismatch in the cost structure, inflation pressure from new labor agreements, and higher casualty costs.

  • Operating revenue was $5.9 billion, down 10% versus last year on a 3% year-over-year volume decline.

  • Freight revenue totaled $5.5 billion, down 9% versus 2022.

  • Fuel expense in the quarter decreased 25% on a 21% decrease in fuel prices from $3.96 a gallon to $3.12.

  • Net income of $1.5 billion declined 19% versus 2022, which when combined with a lower average share count resulted in an 18% decrease in earnings per share to $2.51.

  • The company returned a little more than half of the cash generated or $3.1 billion to shareholders through dividends and share repurchases.

  • The company is facing a demand environment where they don't expect full year volumes to exceed industrial production.

Union Pacific's (UNP) growth strategy is centered around several key areas:

  1. Empowering Employees: UNP aims to drive decision-making lower in the organization by reducing layers and simplifying how they work. This is a cultural change aimed at delivering value with speed.

  2. Operational Excellence: UNP is committed to safety, service, and operational excellence. They aim to manage fluctuations in business volumes and weather challenges by keeping a buffer of resources.

  3. Business Development: UNP has a relentless focus on business development. They are driving growth in their Rock network that supports construction of new emerging LNG facilities along the Texas Gulf and growth in the petroleum products for both domestic and Mexico energy reform.

  4. Diverse Portfolio: UNP has a diverse portfolio that allows them to see positive momentum in some of their commodities. They are actively pursuing a strong pipeline of opportunities by leveraging their great franchise and extending their reach with transload, Interline, and short line partners.

  5. Improved Service Product: UNP believes their improved service product positions them well to handle market demand. They expect automotive growth to continue, driven by strong OEM production and elevated shippable ground count.

  6. Efficiency: UNP is focused on driving operational efficiency and productivity. They aim to reduce dwell time and increase fluidity in their operations. They are also looking at ways to be more efficient in terms of fuel usage and equipment rent.

  7. Growth Beyond Economy: UNP aims to grow faster than what the economy gives them. They believe that by providing consistent service and leveraging the physical plant they have, they can capture more market opportunities.

UNP's cost containment strategy includes the following measures:

  1. Lowering fuel prices: UNP has managed to decrease operating expenses by reducing fuel prices. This has been a significant factor in their cost containment strategy.

  2. Managing labor costs: UNP has reached agreements with labor unions which resulted in a one-time charge in 2022. This has helped in reducing the overall labor costs. They have also increased workforce levels and provided increased sick leave benefits to their craft professionals.

  3. Reducing volume-related costs: UNP has managed to decrease volume-related costs which has contributed to their cost containment strategy.

  4. Improving productivity: UNP is focusing on improving overall productivity. They have managed to keep the cost per employee essentially flat in the third quarter and are working towards generating better overall productivity.

  5. Reducing workforce training: UNP has managed to reduce the number of employees in training, which has helped in reducing costs.

  6. Managing inflation: UNP is working on strategies to manage inflation pressures. They are looking at how they can be more productive in every part of their business to chip away at inflation.

  7. Reducing equipment rent: UNP is working on speeding up the network and turning the assets more efficiently to reduce equipment rent costs.

Based on the 3Q conference call, the best performing commodity types for UNP (Union Pacific) were:

  1. Automotive volumes: There was continued strength in OEM production and dealer inventory replenishment for finished vehicles and auto parts.

  2. Rock network: There was excellent growth in the Rock network that supports the construction of new emerging LNG facilities along the Texas Gulf and growth in the petroleum products for both domestic and Mexico energy reform.

  3. Renewable biofuel feedstock: The forecast for renewable biofuel feedstock continues to remain strong with solid demand in this market and new business being captured.

Based on the 3Q conference call, the worst performing commodity types for Union Pacific (UNP) were:

  1. Bulk: Freight revenues from bulk shipments, which include grain and grain products, fertilizer, food and refrigerated, and coal and renewables, decreased due to lower fuel surcharge revenues and volume declines. The volume declined 4% in the third quarter of 2023 compared to 2022, driven by reduced use of coal in electricity generation because of low natural gas prices and decreased export grain shipments due to tight supplies.

  2. Industrial: Freight revenues from industrial shipments, which include industrial chemicals and plastics, metals and minerals, forest products, and energy and specialized markets, decreased due to lower fuel surcharge revenues and negative mix of traffic from decreased lumber shipments and increased short haul rock shipments. While there was growth in metals and minerals due to strong demand for rock, that growth was offset by decreases in forest products due to the softening housing market and fewer shipments of brown paper as demand for non-durable goods declined.

Outlook:

Based on the information from the Union Pacific (UNP) 2023 Q3 Earnings call transcript, the outlook for the remainder of 2023 is largely unchanged. They are facing a demand environment where they don't expect full year volumes to exceed industrial production. However, they still expect to generate pricing dollars in excess of inflation dollars. Fuel remains a headwind on earnings per share, although moderating from the $0.34 negative EPS impact in the third quarter to approximately $0.10 of negative year-over-year impact in the fourth quarter. Significant inflation headwinds remain primarily in the form of new labor agreements. Their capital plan is coming in a little bit higher at $3.7 billion. They are making gains from maximizing growth opportunities and repricing their business to improving service and generating productivity, striving to build on the current momentum as they end 2023 and enter 2024 on a path to further financial improvement.

In terms of specific sectors, they anticipate continued challenges in coal as natural gas futures remain volatile. They are watching grain closely as they enter the export season. The economic forecast for industrial production looks to stay depressed in the fourth quarter. However, they expect petroleum and construction markets to remain favorable due to their focus on business development. They are staying close with their intermodal customers in this challenging demand environment. They expect automotive growth to continue, driven by strong OEM production and elevated shippable ground count.

Sources:

AI response ends.

OK, so that was pretty good, 95% of it was useable and since I know what good looks like (because I’ve been doing this for 30 years) I can clean up the bad stuff and the repeated responses from the AI and after 5 minutes my report is finished. What I need to know about UNP’s 3Q is archived. I just saved 2 hours note taking and writing my report.

What is profound is that the mundane jobs we analysts do (which is a lot of copy/paste) can and will be automated. It will help talented analysts work on more alpha-generating activities. This is a good thing. It will level-up average analysts. This is a good thing.

In my next post I will either talk about 1) more AI in research or 2) whether research teams in asset management should be serial or parallel processors or 3) something else that rises to the top of my mind. Vote on the next topic in the comments.

Until then.

Cheers,

Drew

Notice: Not investment advice. All thoughts are my own and not of my current or former employers.

 

 

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