Union Pacific Earnings Preview: Expect Industrial Products To Drive Q1 Growth

Union Pacific Corporation (NYSE: UNP) is set to report its Q1 2018 earnings on April 26, and we expect the company to post steady growth, primarily led by industrial products freight, which saw an uptick of 28% (y-o-y) in the previous quarter. We also expect the company’s other segments, such as Chemicals, and Intermodal to see moderate revenue growth, as the company benefits from the capacity constraints in the trucking industry. However, coal freight may drift lower, amid stable natural gas prices, and a decline in the U.S. coal production. We have created an interactive dashboard on Union Pacific’s expected performance in 2018. You can adjust the revenue and margin drivers to see the impact on the company’s performance.

Expect Industrial Freight Segment To Drive Growth Led By Higher Oil Prices

We expect UNP’s Industrial Freight revenues to grow 5% to $4.28 billion in 2018. We expect this growth to be driven by a recovery in the commodities market, which will result in more shipments for railroad companies. For instance, the U.S. oil production is expected to be 10.7 million b/d in 2018, the highest annual average U.S. crude oil production level ever. So far, WTI crude has rallied to $69, and there is no sign of weakening demand. This will likely boost drilling activity and increase the demand for crude oil related shipments as well. Beyond crude, steel shipments are expected to increase, as many players in the U.S. are adding capacity. The steel demand in North America is expected to grow by 3%, as compared to 1.8% expected growth globally. Favorable demand-supply dynamics with respect to these commodities will boost segment revenue growth. Accordingly, we forecast a low single digit growth, both on volume and pricing for UNP’s Industrial Freight segment.

Looking at the company’s other segments, including Chemicals, and Agriculture, among others, we expect low single digit growth both in volume and pricing. Volume will likely be driven by a positive impact of capacity constraints in the trucking industry, given the full implementation of the ELD mandate. In addition, increasing consumer demand will also aid the volume growth, while the pricing growth will be led by increased fuel surcharge, which is linked to prices of WTI or U.S. On Highway Diesel. With oil prices expected to trend higher in 2018, higher fuel surcharge revenues will aid the company’s overall revenues. However, coal freight may drift lower due to lower export volume, and natural gas prices. The coal export volume is expected to decline by 17% in 2018. In addition, stable natural has prices will have an impact on overall volume growth.

Overall, we expect the company to post earnings of $7.83 in 2018. We forecast a price to earnings multiple of 17.5 by the end of 2018, which is slightly lower than most of the estimates for the sector, to arrive at our price estimate of $138 for Union Pacific Corporation, which is more or less in line with the current market price.

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