A Turnaround Year For Union Pacific

by Trefis Team
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Union Pacific Corporation
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The fate of the US railroad and shipping industry has seen a turnaround in 2017, as the sector became one of the key beneficiaries of the leadership change in the US this year. With Donald Trump taking over the reins of the world’s largest economy and implementing favorable regulatory policies, the slump in the railroad sector has been revived. The coal shipments, which had plunged sharply over the last few years, have witnessed a surge this year, boosting the valuation of these railroad companies. Further, the US economy in general has been showing strong signs of growth, which has further improved the future prospects of these companies. Union Pacific (NYSE: UNP) is one such railroad company whose stock has jumped close to 30% since the beginning of the year, backed by the improvements in the US economy and policy decisions. In this note, we discuss, how the company has performed in 2017 and the outlook for 2018.

See Our Complete Analysis For Union Pacific Corporation Here

Rising Coal Shipments To Complement Top-Line

With the increased awareness about climate change and its implications, the preference for cleaner and safer sources of energy has magnified. As a result, most of the countries are shifting from coal-based economies to gas-based economies, which had led to a sharp drop in coal shipments worldwide. However, with the appointment of Donald Trump as the US President, this trend seems to be reversing. Since the US, under Trump’s administration, has announced its plans to pull back from the Paris Agreement, the coal shipments in the country have gone up drastically. The US coal shipments stood at 4.18 million carloads last month, 8.4% higher compared to the same period of last year ((Weekly US Rail Traffic, Association of American Railroads)).

Consequently, railroad companies who derive a significant portion of their revenue from coal shipments, have largely benefited from this move. For instance, Union Pacific’s revenue and profitability has improved drastically over the first nine months of 2017. Assuming that the government’s current stance on the climate change issue remains unchanged, we expect US coal shipments to continue to rise in the coming quarters, further boosting UNP’s top-line as well as bottom-line in the near term.

Improvement In US Economy To Drive Value

Over the last few quarters, the US economy has been performing strongly. This is evident from the fact that the country’s unemployment rate, which had risen up to 10% in 2010, has stabilized at around 4% of late. Also, the US dollar has continued to strengthen versus a majority of the other currencies, indicating a steady growth in the economy. The US Gross Domestic Product (GDP) has grown by 3% in the third quarter despite the disruption caused by the recent hurricanes, beating the market estimate of a 2.5% rise in the GDP.

Thus, we believe that the strong recovery in the US economy is likely to result in an improvement in the construction markets, particularly non-residential construction, which is expected to prop up the rail shipments of industrials as well as non-metallic minerals. Consequently, we expect Union Pacific’s value to rise notably in the next few quarters.

Auto Sales To Pull Down Revenues

Contrary to this, the automobile industry has not been doing so well. Auto sales have declined sharply through 2017, as the demand for light vehicles has slowed down, despite large discounts being offered by manufacturers to clear their previous inventories. The most prominent factor for this drop is the low replacement rate. In other words, the pace at which cars or trucks are being purchased is not the same as the pace at which they are being replaced. Hence, there has been a void in the demand for these vehicles, which is visible from the decline in their sales year-to-date.

For 2017, the US light vehicle sales forecast stands at 17 million units, which almost 3% lower than the record rate of 17.5 million units in 2016. Thus, Union Pacific is expected to witness weakness in the auto shipments in the next few months. That said, the damages caused by the recent hurricanes in the US could provide some short-term opportunities for the industry and UNP.

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