What To Expect From Union Pacific’s Q2?

Union Pacific Corporation (NYSE: UNP) is set to report its Q2 2018 earnings on July 19, and we expect the company to post modest growth, primarily led by energy and industrial products freight. Within energy, an increase in oil-related freight will likely be partly offset by a decline in coal freight, due to lower expected production, and stable natural gas prices. The company benefited from pricing gains amid higher fuel surcharges in the previous quarter, and this trend will likely continue in Q2 as well. We also expect the company’s Premium segment (Intermodal) to grow in mid-single digits. We have created an interactive dashboard ~ What Is The Outlook For Union Pacific? ~ on the company’s expected performance in 2018. You can adjust the revenue and margin drivers to see the impact on the company’s overall revenues, earnings, and price estimate.

Expect Energy And Premium Freight Segment To Drive Earnings Growth

We expect Union Pacific’s coal freight revenues to slightly decline in Q2. However, we forecast a mid single digit increase for the full year. In the near term, an expected decline in coal production as well as exports will likely weigh on the segment performance. U.S. coal production as well as exports declined by over 3.5% in Q1 2018 (q-o-q). In the first half of the year it will likely see a 2% decline, according to EIA. This will likely impact the volume and pricing in Q2. However, for the full year, coal production is expected to be more or less similar to that of 2017. Accordingly, we forecast the segment revenues to be $2.78 billion, reflecting only a 5% increase, as compared to the prior year revenues. This growth will partly be aided by better pricing, due to higher fuel surcharges.

Within the energy basket, frac sand, and oil related shipments should see a rise in the near term. The U.S. oil production is expected to be 10.8 million b/d in 2018, the highest annual average U.S. crude oil production level ever. So far, Brent crude has rallied to north of $80 earlier in this year, and currently trades at around $72. Higher oil prices will likely boost drilling activity and increase the demand for crude oil related shipments as well. In fact, increased shale drilling activity has led to higher shipments of frac sand in the recent past, and this trend will likely continue in the near term.

Looking at other segments, we expect mid-single digit growth for the Intermodal segment (reported under Premium). The Hours-of-Service safety regulation for truck drivers, introduced on July 1, 2013, and now being fully implemented, has put a constraint on the capacity of the trucking industry.  This increases the competitive advantage of railroads over trucks. As shippers move to railroads to ship freight, Union Pacific’s Intermodal segment should benefit from the same.

Overall, we expect the company to post earnings of $7.70 in 2018. We forecast a price to earnings multiple of 19x by the end of 2018, which is slightly lower than most of the estimates for the sector, to arrive at our price estimate of $145 for Union Pacific Corporation, which is at a 5% premium to the current market price.

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