What Will Drive Union Pacific’s Growth In 2019?

by Trefis Team
Union Pacific Corporation
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Union Pacific Corporation (NYSE: UNP) saw high single-digit revenue growth, while its EBITDA was up in mid-single-digits for the full year 2018. This can be attributed to strong trends in the company’s premium segment, which includes intermodal and automotive freight. The Intermodal business saw strong growth last year, due to capacity constraints in the trucking industry. Looking forward, we expect the overall revenue growth to be relatively slower in 2019. Intermodal should continue to lead the growth for Union Pacific. We have created an interactive dashboard ~ How Did Union Pacific Fare In 2018, And What Can We Expect In 2019? You can adjust various drivers to see the impact on the company’s overall earnings, and price estimate. Below we discuss our forecast in detail.  In addition, here is more Industrials data.

Expect Revenues To Grow In Low-To-Mid Single-Digits In 2019

Union Pacific generates its revenues from the freight of agriculture, industrial, energy, and premium products. Agriculture freight was up 4% in 2018, primarily led by higher average revenue per carload, while its volume was actually down in low single-digits. The growth in average revenue per carload was visible across segments, primarily due to higher fuel surcharge revenues. The crude oil prices were trending higher till the third quarter of last year, and railroad companies benefited from the same. The Agriculture products volume decline can primarily be attributed to lower grain shipments, primarily wheat and soybean export. Looking forward, the agriculture volume is expected to remain soft, given the foreign tariffs. Overall, segment revenues could see modest growth, led by better pricing. However, the movement in crude oil prices will be an important factor to watch out for.

Energy freight revenues grew in low single-digits last year, led by a modest decline in volume, and growth in average revenue per energy carload. The energy segment includes freight from coal, sand and petroleum, liquid petroleum gases (LPG), and renewables. Coal revenues declined in mid-single-digits in the last quarter, due to a contract loss, and the company expects these headwinds to continue in 2019 as well. Note that coal accounts for over 70% of the segment freight revenues. As such, we forecast only a low single-digit growth in segment revenues, driven by higher petroleum products shipments, given the increased drilling activity in the U.S. The overall U.S. output is expected to expand by over 1 million barrels in 2019.

Industrial freight revenue was up in high single-digits in 2018, led by gains in both volume, and average revenue per carload. This can be attributed to higher industrial production, which was up 4% (y-o-y) in December 2018. This led to higher shipments of metals, construction products, plastics, and industrial chemicals. This trend will likely continue in 2019, and drive the segment revenues higher. The company should see higher shipments of metals and construction related commodities, given that 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.

Looking at the premium segment, most of the railroad companies benefited from tight trucking capacity in 2018, and Union Pacific saw revenue growth in the low teens, led by strong volume and pricing gains. The trends in the trucking industry are favorable for railroad companies, as manufacturers look for alternative means of transport. Any significant growth in trucking capacity in 2019 is unlikely, given that there is a shortage of drivers. As such, railroad companies should continue to see steady growth in intermodal revenues.

The company last year 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. We expect the company’s EBITDA margins to improve by 100 basis points in 2019, resulting in mid-single-digit growth in EBITDA to $11.40 billion. We forecast the company’s earnings to be $9.05 per share in 2019, reflecting a low teens growth over the prior year. Our price estimate of $159 for Union Pacific is based of a 18x forward price to earnings multiple. 


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