UBS Downgrades Union Pacific Amid 'Further Revenue Malaise'

Union Pacific Corporation UNP has been facing a mix issue, which has put earnings under pressure. UBS’ Thomas Wadewitz downgraded the rating for the company from Buy to Neutral, while reducing the price target from $89 to $88.

The Wait Gets Longer

Union Pacific’s y/y volume trend declined sharply in 1Q16. Analyst Thomas Wadewitz expects the mix issue faced by the company in 4Q to continue. He elaborated, “While UNP has demonstrated an ability to take out cost, we expect the step down in base revenue to overwhelm the cost reduction leading to further cuts to EPS estimates.”

While there may not be significant downside in the near term, there seems to be a lack of visibility into a catalyst for an improvement in revenue generation or EPS growth, Wadewitz commented.

Coal Issue Beyond 2016

Union Pacific’s coal volumes are down a massive 40 percent, reflecting very large stockpiles and low natural gas prices. “It would likely take more than a hot summer to burn through the current stocks but of greater concern in the long term is the large addition of natural gas and renewables capacity,” the analyst wrote.

The EPS estimates for 2016, 2017 and 2018 have been reduced from $5.08 to $4.99, from $5.75 to $5.65 and from $6.45 to $6.35, respectively.