Updated Research Report on Union Pacific - Analyst Blog

On May 9, 2014, we issued an updated research report on Union Pacific Corporation UNP. We appreciate the company's ability to counter declines in coal revenues with growth in chemicals, intermodal and industrial and agricultural segments. However, stiff competition and regulatory issues somewhat dampen our optimism regarding the company. Union Pacific currently carries a Zacks Rank #2 (Buy).

 

Growth opportunities across various sectors and improvement in the economy will likely drive continuous volume growth in 2014, which in turn should lead to margin expansion. Union Pacific expects volume growth on strong grain shipments, finished vehicle sales and movement of several other industrial goods during the second quarter. 

 

The company is progressing well on its operating and productivity improvements to provide safe, efficient service and is confident about a sub 65% operating ratio before 2017. We believe that Union Pacific has opportunities to improve yields backed by a higher rate of contract re-pricing, which is due next year. Further, a strong balance sheet allows the company to raise dividends and buy back shares, thus boosting its shareholders' return.  

 

Apart from grain and automotive, the company will benefit from strong crude-by-rail market conditions, imported beer delivery and recovery in housing starts. Shale-related activity along with increased drilling, and a ramp-up in pipeline projects and strength in intermodal volume is expected to continue based on the ongoing domestic expansion and truckload conversion.

 

At the same time, decline in coal revenues despite an increase in volumes is anticipated to weigh on the company's coal business in 2014. Additionally, the company foresees fewer legacy re-pricing opportunities this year. As a result, pricing gains is expected to be softer in 2014 compared to 2013.

 

A major challenge for railroads is the uncertain regulatory environment in the U.S., Canada and Mexico. Some of the proposed regulations in these countries can pose hurdles for railroad carriers, thus affecting their performance. Further, Union Pacific expects an increase of about 7% to 8% in depreciation expenses in 2014. Other expenses are expected to increase 5% to 10% in 2014, excluding any unusual item.

 

Stocks that Warrant a Look

 

Other stocks that warrant a look in this sector include GATX Corp. GMT, Trinity Industries Inc. TRN and Kansas City Southern Corp. KSU. GMT and TRN sport a Zacks Rank #1 (Strong Buy), while KSU carries the same rank as UNP.