What’s Driving Our $158 Price Estimate For Union Pacific?

by Trefis Team
Union Pacific Corporation
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Union Pacific Corporation’s (NYSE: UNP) stock price has been on a strong run with 25% gains year-to-date. This can be attributed to improved efficiency, and lower operating ratio witnessed over the recent quarters, among other factors. However, we estimate the fair value of the stock price based on 2019 earnings to be around $158, which is slightly below the current market price. This note details Trefis’ forecasts for the full year 2019. You can view our interactive dashboard analysis ~ What Is The Share Price Estimate For Union Pacific Based On Expected 2019 Earnings? ~ for more details on the expected performance of the company. In addition, you can see more of our data for industrial companies here.

What Are The Key Sources of Union Pacific’s Revenue, And How Have They Trended In The Recent Quarters?

  • Union Pacific generates its revenues primarily from various commodities freight, including energy, industrial, premium, and agriculture. Premium segment includes intermodal freight, which refers to the shipment of containers that can be moved from one form of transport to another. The segment also includes automotive freight. The segment revenues of $6.63 billion in 2018 accounted for roughly 30% of the company’s total revenues.
  • Energy segment refers to shipments related to coal, crude oil, sand, and petroleum products. The segment generated revenues of $4.61 billion last year, reflecting 20% of total sales.
  • Industrial freight revenues are derived from the shipment of industrial commodities. The segment revenues of $5.70 billion in 2018 contributed roughly 25% to the company’s overall sales.
  • Agriculture refers to grains, fertilizers, ethanol, and biofuel related shipments, and its last year revenues of $4.47 billion accounted for roughly 20% of the company’s total revenues.
  • Total Revenues for Union Pacific have largely trended higher over recent quarters, growing from $5.45 billion in Q4 2017 to $5.93 billion in Q3 2018. However, the revenues declined sequentially thereafter to $5.38 billion in Q1 2019. The growth in 2018 can primarily be attributed to the capacity constraints in the trucking industry, which benefited railroad companies at large. However, the decline in the recent past can largely be attributed to the Energy segment, amid declining coal and sand shipments.

How Does The Revenue Growth of Union Pacific Compare To Its Peers?

  • Union Pacific’s revenues have grown at an average of 1.0% from $5.45 billion in Q4 2017 to $5.72 billion in Q1 2019. This has more or less been similar to the growth seen by its peers.
  • CSX Corporation’s average revenue grew at 1.1% over the past 5 quarters.
  • Norfolk Southern’s revenues have grown at an average of 1.3% from $2.67 billion in Q4 2017 to $2.84 billion in Q1 2019.

How Much Can Union Pacific’s Top Line Grow In 2019?

Union Pacific’s top line will likely grow in low single-digits to $23.1 billion in 2019. This is slightly below the consensus estimate of $23.4 billion.

  • Premium segment revenues of $6.6 billion in 2018 reflected 14% growth y-o-y, and the growth will likely moderate to 4% in 2019 with segment revenues of $6.9 billion. The growth in 2018 was primarily led by capacity constraints in the trucking industry. However, given the constraints, intermodal could also see impact on shipments that needs to be connected via trucks for some of the routes. Looking at Automotive, the U.S. light vehicle sales are expected to decline 2% to 16.8 million units in 2019.
  • Energy revenues grew 2% in 2018 led by strong exports. However, we expect a 7% decline in 2019. This can be attributed to ongoing trade tensions and its impact on exports, while domestic coal demand continues to fall. Coal shipments declined 14% in Q1.
    • Coal consumption is expected to decline 12% (y-o-y) to 603 million short tons (mst) in 2019.
    • Estimated coal exports of 98 mst in 2019 will reflect 15% decline over last year.
    • Coal production is expected to decline 7% to 700 mst in 2019.
  • Industrial revenues grew 9% in 2018, and will likely grow 6% in 2019, led by a slight improvement in volume as well as average revenue per carload. The company saw a 12% uptick in construction carloads in the previous quarter. The U.S. construction sector is forecast to grow in mid-single-digits over the next three years. This should result in higher shipments of metals, construction products, plastics, and industrial chemicals.
  • Agriculture freight revenues of $4.5 billion in 2018 reflects 4% y-o-y growth, while it could decline 1% to $4.4 billion in 2019. This can be attributed to uncertainties related to Agriculture exports. The U.S. government has imposed several foreign tariffs, which will likely impact the grain exports at large, and in turn impact the railroad shipments.

How Much Can Union Pacific’s Earnings Grow Based On The Expected Revenue Trends Above?

  • Union Pacific’s full year 2019 earnings will likely be $9.09 per share, reflecting a 15% growth over the prior year. This is in line with the average consensus estimate of $9.09.
  • Earnings growth can be attributed to higher revenues, lower share count, and expected growth in margins, as the company remains focused on reducing its operating ratio.
  • Operating ratio fell only one point to 63.6% in Q1 2019. This can be attributed to weather conditions, which negatively impacted operating ratio by 1.6 points.
  • 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.

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