Union Pacific and Norfolk Southern in Talks. Stocks Drop.

Railroad stocks have been roiled recently by reports of potential M&A in the sector. (Kyle Grillot/Bloomberg)

Union Pacific delivered a solid second-quarter earnings report on Thursday. That isn’t what investors are most interested in, however. Union Pacific confirmed it is in merger talks with Norfolk Southern.

“Union Pacific Corporation and Norfolk Southern Corporation confirmed today that the companies are engaged in advanced discussions regarding a potential business combination,” reads part of a news release. There is no guarantee a transaction will occur, and the pair does not intend to comment further, the companies added.

Norfolk stock traded as high as $288.11, but closed at $278, down 0.8%, while Union Pacific stock lost 4.5%, closing at $220.52. The S&P 500 added 0.1% and the Dow Jones Industrial Average lost 0.7%.

Union Pacific announced adjusted earnings per share of $3.03 on sales of $6.2 billion. Wall Street was looking for earnings per share of $2.91 on sales of $6.1 billion, according to FactSet. A year ago, in the second quarter of 2024, Union Pacific reported earnings per share of $2.74 on sales of $6 billion.

Operations ran well. Freight car velocity was 221 daily miles per car, a 10% improvement, according to the company. Locomotive productivity increased 5%, average maximum train length was 9,689 feet, a 2% increase, and workforce productivity improved 9% to 1,124 car miles per employee.

Bulk carloads of 519,000 rose from 491,000 in the first quarter of 2025. Industrial carloads grew to 569,000 from 537,000. Intermodal volume, however, dipped to 817,000 carloads from 874,000.

“Our second-quarter results demonstrate our commitment to leading the industry as we set new standards for safety, service, and operational excellence,” said CEO Jim Vena in a news release. “The foundation is built, we are growing with our customers, and we have strong momentum as we continue to maximize the value of our great franchise.”

M&A news, however, trumps a quarterly earnings report. Union Pacific will be seen as the acquirer. It is the larger company and will likely have to pay a premium for Norfolk shares, one reason for the early stock reactions.

A week ago, The Wall Street Journal reported Union Pacific was considering a merger with Norfolk, citing people familiar with the matter. Union Pacific declined to comment. The article followed a Semafor report that Union Pacific had hired a banker to explore potential acquisitions.

Union Pacific CEO Jim Vena first got merger rumors rolling in May by arguing that consolidation could help the rail industry compete against truckers, with faster service. A merger with Norfolk might let Union Pacific bypass the Chicago interchange—which today adds a day or two to any transcontinental rail shipment.

Since 2000, there has only been one Class 1 rail merger: the 2023 purchase of Kansas City Southern by Canadian Pacific. In that case, the rail industry regulator, the Surface Transportation Board, was persuaded to waive tougher 2001 merger standards.

A deal might look like a long shot. Still, consolidation has benefited the U.S. rail business over time, helping boost efficiency and profit margins. Union Pacific’s operating-profit margins have risen to about 40% from below 30% 15 years ago.

If M&A activity heats up in the sector, it will likely involve additional players such as Berkshire Hathaway’s BNSF, Canadian railroads, or CSX.

Since the Semafor report, Union Pacific stock was down about 0.1% coming into Thursday trading. CSX and Norfolk shares were up about 5% and 8%, respectively.

Write to Al Root at allen.root@dowjones.com