Union Pacific stock (NYSE: UNP) is scheduled to report its Q1 2021 results on Thursday, April 22. We expect Union Pacific to likely post revenue and earnings above the street expectations, due to higher demand for railroad, especially intermodal, amid continued driver shortages being faced by the trucking industry. The overall rebound in the economy likely aided the freight revenues for its other segments, including Industrial and Premium.
Our forecast indicates that Union Pacific’s valuation is around $245 per share, which is 10% above the current market price of around $222. Our interactive dashboard analysis on Union Pacific’s Pre-Earnings has additional details.
(1) Revenues expected to be slightly above the consensus estimates
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Trefis estimates Union Pacific’s Q1 2021 revenues to be around $5.1 Bil, slightly above the $5.0 Bil consensus estimate. The gradual opening up of economies and vaccination programs in the U.S. has resulted in a pickup in economic activities, and this should bode well for Union Pacific’s freight business. The trucking industry still faces a driver shortage, and railroad companies, including Union Pacific, likely benefited from this with higher intermodal revenues. Looking back at Q4 2020, revenues declined 1% to $5.1 Bil, with coal freight revenue down 21%, a trend expected to continue in the near term given lower demand for power. Our dashboard on Union Pacific’s Revenues offers more details on the company’s segments.
2) EPS also likely to be above the consensus estimates
Union Pacific’s Q1 2021 earnings per share (EPS) is expected to be $2.10 per Trefis analysis, slightly above the consensus estimate of $2.05. Union Pacific’s net income of $1.38 billion in Q4 2020 reflected a 2% drop from its $1.40 billion figure in the prior-year quarter. This can be attributed to lower revenues and higher operating costs owing to the pandemic. That said, the margins will likely improve going forward, driven by the company’s focus to reduce its operating ratio. For the full-year 2021, we expect the EPS to be $9.50 compared to $7.88 in 2020.
(3) Stock price estimate 10% above the current market price
Going by our Union Pacific’s Valuation, with an EPS estimate of around $9.50 and a P/E multiple of around 26x in 2021, this translates into a price of $245, which is 10% above the current market price of around $222. At the current price of $222, UNP stock is trading at 23x its 2021 earnings estimate of $9.50 per share, which compares with levels of 26x seen in late 2020, implying there is more room for growth.
Although the continued challenges in the coal and other energy freight business will have some impact on Union Pacific’s overall revenue growth rate in 2021, we believe the demand for the Industrial and Premium freight will see a rebound, driven by the resumption of economic activities and increased demand for transportation.
Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Earnings for the full year
While UNP stock may have more room for growth, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Canadian Pacific Railway vs. D R Horton.