Intermodal And Industrial Freight Will Likely Drive Union Pacific’s Near Term Earnings Growth

by Trefis Team
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Union Pacific Corporation
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Union Pacific Corporation (NYSE: UNP) is seeing strong growth in its Intermodal business of late, due to constraints in the trucking industry. In addition, there has been a ramp up in industrial products shipments amid higher industrial production. However, agricultural products and coal freight business continues to see slow growth amid coal related pricing concerns for Union Pacific, as well as weak grain exports from the U.S. These trends will likely continue in the near term, and the company’s growth will primarily be led by its Intermodal and Industrial freight segments. We have created an interactive dashboard ~ What Will Drive Union Pacific’s Near Term Growth ~ on the company’s expected performance in 2018. You can adjust the segment revenue drivers to see the impact on the company’s overall earnings, and price estimate.

Intermodal & Industrial Freight Will Likely See Strong Growth In The Near Term

We forecast a low double digit growth for Union Pacific’s Intermodal segment revenues for the full year, led by both pricing and volume gains. Volume will likely be driven by continued constraint in the trucking industry, while the average revenue per carload will partly benefit from higher fuel surcharges, given the movement in oil prices this year. The trends in the trucking industry are favorable for railroad companies, as manufacturers look for alternative means of transport. Looking at the nine month period ending September 2018, the Premium segment volume grew 6% and average revenue per unit grew 7%. Note that Intermodal is reported under the Premium segment by Union Pacific under its new segment reporting structure. Separately, the company recently launched Unified Plan 2020 aimed at better efficiency. This plan should help improve margins and create more reliability for customers, and aid the company’s overall earnings growth in the coming years.

Looking at the Industrial freight, the segment revenues have grown in high single digits year-to-date, and we expect this trend to continue in the near term. This can be attributed to expected higher shipments for metals and construction related commodities. The U.S. construction sector is forecast to grow in mid-single digits over the next three years, according to a research report. This growth will be led by both residential and non-residential construction. Also, there is an increase in plastic production in the U.S., which has aided the Industrial shipments for Union Pacific in the previous quarter, and this trend could continue in the near term.

Expect Coal And Agriculture Freight To Face Headwinds In The Near Term

Agriculture freight revenues have seen a low single digit revenue growth in the nine month period ending September 2018, with a decline in volume. The segment volume is being impacted by the weakness of the U.S. agricultural products in the global markets, which has taken a toll on export shipments. While Q3 was better for Union Pacific with a low single digit growth in volume, amid increased corn and soybean exports, foreign tariffs could weigh on the overall agricultural exports, and impact the volume growth in the near term.

Looking at Coal freight, we don’t expect any significant growth in revenues, as the company’s management in its recent earnings conference call stated that it is seeing pressure on pricing. The company has lost some of the coal business, which is impacting the overall segment performance. Note that coal freight for other railroad companies, such as CSX Corporation, is trending well amid higher exports, and the favorable trends in natural gas prices.

Overall, we expect the Intermodal and Industrial segment to drive the company’s near term growth. We currently forecast the earnings of $7.90 per share in 2018. We use a TTM price to earnings multiple of around 19.5x,, to arrive at our price estimate of $154 for Union Pacific, which is slightly above the current market price.

 

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