Union Pacific Remains BMO's 'Top Pick,' Here's Why

On June 25, 2015, BMO Capital Markets hosted meetings with institutional investors and Union Pacific Corporation UNP’s management -- Robert Knight, Chief Financial Officer, Mary Jones, Vice President and Treasurer, and Mike Staffenbeal, Assistant Vice President of Investor Relations.  Following these encounters, analysts Fadi Chamoun and Devin Dodge reiterated an Outperform rating and $127 price target on the stock.

Union Pacific remains BMO’s top pick due to its robust network, organic growth potential, margin improvement opportunities and sturdy outlook for EPS growth and free cash flow, the report states. Shareholder distributions are expected to surge at a faster pace than earnings over the next several years “as the company utilizes a portion of its spare debt capacity,” the analysts add. In addition, they see the recent pullback in valuation providing attractive entry point for investors.

From a near-term earnings standpoint, and compared to the earnings of $1.30 per share reported in the first quarter of 2015, “there are a number of moving variables with negative mix shifts and reduced benefit from fuel offset by slightly higher carloads q/q, expected gains from the sale of real estate and modest improvement in costs as resources are gradually re-aligned with demand,” the experts expound.

Overall, they say, they feel good about their second quarter EPS estimate of $1.37. Going forward, they see the “demand environment in the merchandise (ex. energy) and intermodal segments” remaining strong while their estimates are “handicapped sufficiently in coal and energy to limit additional EPS downside to less than 5%.”

The firm anticipates pricing will remain robust over the near-to-intermediate term and we expect the company’s long-term trend of improving productivity and margins to resume later this year and into 2016 as the company seems on the right track to rebalancing resources with volumes.