UPDATE 3-Union Pacific beats estimates, stock jumps

(Adds executive comment, byline, updates stock action)

By Nick Carey

CHICAGO, Oct 18 (Reuters) - No. 1 U.S. railroad Union Pacific Corp (UNP.N) posted a better-than-expected jump in quarterly profit on Thursday due to higher freight volumes and strong pricing, sending its shares up more than 4 percent.

But the railroad warned it was wary over U.S. economic health and fuel prices.

"Near-term we remain cautious on the economy and see challenges from rapidly increasing diesel fuel prices," Union Pacific Chief Executive Jim Young said in a statement.

So far this year U.S. railroads have posted higher profits despite weaker freight volumes due to the country's housing sector slowdown and slacker business from the struggling U.S. domestic automakers.

Union Pacific's third-quarter results - with both higher profits and stronger volumes - bucked that trend.

"This is a surprisingly strong quarter, I had to do a double-take" said Shawn Campbell, principal of Chicago-based Campbell Asset Management, which manages assets of around $100 million. The company does not currently hold Union Pacific stock, but monitors the stock. "Except for the company's note of caution on the economy, Union Pacific appears to be hitting on all cylinders."

The Omaha, Nebraska-based company reported third-quarter net income of $532 million or $2.00 per share, compared with $420 million or $1.54 per share a year earlier.

Wall Street analysts had on average expected earnings per share for the quarter of $1.77, according to Reuters Estimates.

Union Pacific said revenue in the third quarter rose to $4.19 billion from $3.98 billion a year earlier. Analysts had expected revenue of $4.21 billion.

Revenue in all the railroad's freight commodity classes was up except for industrial products, where revenue fell 4 percent. Revenue per carload for agricultural products was up 12 percent, energy (mostly coal) was up 8 percent and automotive revenue rose 7 percent, which Young attributed to higher parts shipments.

The number of carloads in the quarter increased to 2.52 million from 2.51 million a year earlier.

The company also reported that its productivity was up, with trains moving faster on its network and trains spending less time at rail terminals.

"This shows that Union Pacific's investments in improving efficiency are beginning to really pay off," Campbell said.

In a telephone interview, Young told Reuters that the company's note of caution on the U.S. economy was due primarily to the housing sector slowdown.

"We've been talking to our customers in this area and they're pretty pessimistic for next year," he said. "We're looking at (our housing-related business) being pretty soft next year."

Young added that he was "cautious" about the outlook for Union Pacific's division hauling industrial products in 2008. The railroad's industrial product carload volumes were down 8 percent in the third quarter.

In trade on the New York Stock Exchange Union Pacific shares were up $5.09 or nearly 4.28 percent at $124.07. (Reporting by Nick Carey)