Union Pacific stock drops 5 percent as fuel prices pushed fourth-quarter expenses higher

  • Union Pacific's operating ratio rose in the fourth quarter.
  • The higher ratio was a disappointment as the rail giant aims to boost efficiency.
  • "We are not satisfied with this operating performance," Chief Operating Officer Cameron Scott said.
Lance Fritz, CEO of Union Pacific
Adam Jeffery | CNBC
Lance Fritz, CEO of Union Pacific

Union Pacific shares dropped more than 5 percent Thursday after it announced its operating ratio rose in the fourth quarter, a disappointment as the rail giant aims to boost efficiency.

Union Pacific is targeting a 60 percent operating ratio by 2019 but saw the measure rise 0.6 points to 62.6 percent in the fourth quarter. Operating ratio — a key indicator watched by Wall Street — represents the company's operating expenses as a percentage of its revenue.

Chief Financial Officer Rob Knight said on a conference call after the report that Union Pacific is aiming to "ultimately" reduce its operating ratio to 55, noting that "over the years" the company has "gone from high 80s to the low 60s."

"We are not satisfied with this operating performance," added Chief Operating Officer Cameron Scott on the call with investors.

The company saw sturdy top- and bottom-line results in the fourth quarter. Union Pacific earned $1.53 per share, in line with a Thomson Reuters survey of analyst expectations. Revenue came in higher than expected at $5.5 billion, up 5 percent from the previous fourth quarter.

The setback in the company's efficiency is "completely resolvable," CEO Lance Fritz told investors. Fritz says the quarter's operating ratio increase was due to "an increase in fuel price."

"At a high level, I think we would have been generating a better operating ratio and overall results with a more fluid network," Fritz added.

In the company's press release, Fritz said a stronger economy and pricing would drive freight volume growth in 2018.

— Reuters contributed to this report.