Looking Beyond The Q3 Miss On Union Pacific

Expecting a rebound in fundamentals, Bernstein maintains its Outperform rating on Union Pacific Corporation (NYSE: UNP) despite a third-quarter EPS miss and cautious commentary on pricing.

Union Pacific’s third-quarter EPS came in at $1.36, which was 2.9 percent below the street and 4.3 percent below Bernstein estimate. Revenue declined 7 percent year-over-year and was essentially in line with the Street/90bps below Bernstein's estimate.

Volume dropped 5.8 percent and the revenue per unit was down 1.6 percent due to weakness in coal and industrial products on low priced natural gas and continued declines in frac sand.

However, the brokerage still expects the company can grow operating income by 7 percent, driven by the inflection in volume and carry forward of productivity efforts.

Although Bernstein cut its forward EPS estimates by around 4 percent to reflect a more challenging near term pricing outlook in energy and intermodal, it sees a rebound in core price as market conditions improve.

“4Q could be challenging, but by 1Q17 we expect that metric to improve as market conditions firm. We recommend longer term investors walk, but don’t run, into the current weakness as weak short-term outlook doesn’t change the long run value of the business,” analyst David Vernon wrote in a note.

Vernon, who has a price target of $110 on the stock, expects concern over multiples could drag down the stock to $85 or so. At a price level of $85–$90, Union Pacific shares will be trading at around 16x free cash flow.

But, the analyst thinks such price levels won’t last for long once core price improves on uptick in volume, fuel, and mix.

At the time of writing, shares of Union Pacific were almost flat at $90.62.

Full ratings data available on Benzinga Pro.