Credit Suisse's 5 Reasons To Buy Union Pacific

Credit Suisse revealed the top five reasons to buy Union Pacific UNP right now in a research report reiterating its outperform rating. The price target was raised from $115 to $119.

1. Core Pricing Improved

A mix of contracts, pricing tied to an increasing escalator and a series of legacy contracts to be renewed in 2015 are all reasons that Credit Suisse sees pricing improvements.

“However, as illustrated below, there are roughly $340 million of legacy contracts in 2015 and ~$100 million in 2016 that are up for renewal, which presents a significant opportunity for UNP to see an acceleration in core pricing gains as well as margin expansion,” writes analyst Allison Landry. The report further comments that these contracts could add 1.5 to 1.7 percent to the top line.

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2. Service Metrics Have Turned

Although performance is still down from 2013, “average trains speed has gradually improved over the first 5 weeks of Q3.”

Credit Suisse further writes that coal volumes have steadily grown, following weakness in the first half of the year.

3. Positive Mix Ahead

“Intermodal volume growth has decelerated, and tougher comps for the commodity type for the
balance of the quarter should lead to slower growth in the coming weeks,” after companies shipped heavily in the second quarter to avoid Q3 disruptions.

Nonetheless, Landry notes that the mix is shipping to higher revenue per unit products. These include grain, automotive and frac sand. Credit Suisse expects 30 percent frac sand growth in 2014 and 17 percent in 2015.

4. Increased Shareholder Returns

A recent dividend increase and increase in leverage support the idea that Union Pacific is committed to returning cash to shareholders.

“The company could generate an additional 2%-3% of EPS accretion relative to this assumption by raising it’s leverage ratio to by 0.1 turns and by applying an additional $500 million of it’s ample FCF towards share repurchases.”

5. Attractive Valuation

Although shares are up 21.4 percent year to date, Credit Suisse writes that valuation is still attractive given EBIT growth expectations. Shares are currently trading at almost 16 times earnings.

Credit Suisse concludes by noting it sees 32 percent upside with just 15 percent downside risk. “With a ratio of roughly 2:1 upside vs. downside in the stock, we continue to believe that UNP is a compelling opportunity for investors.”

Shares of Union Pacific were last trading at $101.99.