Morgan Stanley On Union Pacific: 'Great Q1 But Guidance Weighs'

Union Pacific Corporation UNP reported better-than-expected 1Q results, with total revenues of $4.8 billion, EPS of $1.16 and operating income of $1.7 billion. Morgan Stanley’s Ravi Shanker maintained an Equal-weight rating for the company, while raising the price target from $73 to $78.

Good Results But Disappointing Guidance

The impact of floods in Texas and Louisiana on Union Pacific’s EPS was a mere $0.01, analyst Ravi Shanker noted. The company’s robust performance was driven by mix and productivity.

“While UNP did not miss on pricing like the other rails which have reported so far, the+2.5% price increase did decline100 bp seq., only half of which was attributable to lapping legacy contract re-pricing,” Shankar wrote.

Union Pacific’s volume guidance for 2Q was weak. The company guided to a 30 percent y/y decline in its coal volumes and a 10 percent y/y decline in its total volumes and down mid-single digit for the year. The company expects comps to get easier in the back half.

Union Pacific is likely to continue facing severe top-line pressures, offset by improved productivity and cost cutting in 2016 and 2017, the analyst said.

Shanker expressed concern over longer-term secular pressures on key rail end-markets and the lack of visibility into the macro environment in the near term. He added, however, that the company seemed “relatively better positioned,” in view of its robust operating metrics, balance sheet and mid-pack valuation.