Union Pacific Corporation (NYSE:UNP) is set to report its earnings this week, on January 19th. It will be the first among the U.S. Class I railroads, that include CSX Corporation (NYSE:CSX), Norfolk Southern Corporation (NYSE:NSC) and Kansas City Southern, to release fourth quarter and financial year 2011 results. We expect that higher traffic volumes due to a recovery in shipping coupled with other encouraging economic indicators that will likely result in higher profits for railroads in the last quarter. With infrastructural improvement plans in place, we think that the company remains well positioned to gain from any potential opportunities and generate good returns for investors.
Our price estimate for Union Pacific is $114, which is around 4% above the current market price.
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Higher traffic volumes to lead revenue growth
Union Pacific registered 4% growth in total carloads and intermodal traffic in the fourth quarter.  Motor vehicles, coal, and chemicals drove the volumes, which grew by 14%, 8% and 5% respectively. Traffic growth together with strong pricing experienced by the industry will boost revenues and earnings for the railroad. Pricing gains of 4.5% contributed to improvement in revenues for the railroad in third quarter, even when the rise in traffic was only marginal.
The third quarter saw an improvement in the company’s operational efficiency despite challenges related to severe weather conditions such as floods in Midwest and droughts in Texas. With better weather conditions in the fourth quarter in general, we see no reason for the company’s consistent efforts to not result in further upgrade of its operational performance. Infrastructural developments to build capacity prepare the company to benefit from future opportunities like an increase in exports to China and other Asian countries.
Overall, we expect Union Pacific to report good profits on the basis of growth in its core business, an increase in industry pricing and improved operations as the company continues to make capital investments required for its growth.Notes: