One Takeaway From Union Pacific's Q3 Report: 'We're Not Worried About Pricing'

A day after Union Pacific Corporation UNP reported an earnings miss for the third quarter, Loop Capital indicated that it is not bothered about the company's pricing, which were below its expectations. The firm maintained its Hold rating and target price of $96, implying about 6 percent upside potential from the current levels.

Analyst Rick Peterson pointed out that pricing for UNP services rose 1.5 percent year over year, which is below its 2–2.5 percent estimates. However, he noted that the trend in pricing is decelerating by 2 percent to reflect long-term cost inflation.

"Some are decelerating faster (UP, NS) than others (CSX, KCS), but we think the end game for all of them is the same. This was also the fifth consecutive quarter UP's pricing has decelerated, which tells the story by itself. Looking forward, if UP's pricing growth now bounces around between 1-3% from year to year depending on where we are in the cycle, we would argue it's no cause for alarm, it's just the new normal," the brokerage viewed in a research note to clients.

Loop Capital listed the following key takeaways from the third quarter results:

• Cost inflation to hurt the company with an estimation of 2.5 percent in 2017, up from around 1.5 percent currently.
• Cost inflation deficit headwind in 2017 cuts the possibility of achieving estimated 60 percent operating ratio by 2019
• In the third quarter, UNP managed expenses very well and efficiently ran its network

UNP closed down $0.27 on the day to $90.37.