What’s Happening With Union Pacific Stock?

by Trefis Team
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Union Pacific Corporation
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[Updated: 6/2/2021] Union Pacific Update

Union Pacific (NYSE: UNP) has seen its stock price rise 33% over the last one year, in-line with the broader markets, with the S&P500 up 36%. The company shipped a lower volume of carloads in 2020, owing to the impact of the Covid-19 pandemic on the overall demand. Union Pacific reported its Q1 results in late April, with revenue still down 4.4% compared to the prior year quarter. However, now that 40% of the U.S. population is fully vaccinated for Covid-19, the economy is expected to see a rebound, and it should bode well for the railroad companies, including Union Pacific.

Union Pacific is likely to see a pickup in demand across its segments – Bulk, Industrial, and Premium – over the coming quarters. While the overall rise in industrial production will bolster the demand for industrial shipments, the expected increase in power consumption globally and a favorable comparison to the lows of last year will likely result in higher coal shipments over the coming quarters. Note that EIA forecasts 8% growth in the U.S. coal production in 2021.

Also, the trucking industry drivers shortage issue will bode well for Union Pacific. Under intermodal transportation, trains are used for the long-haul portion of the shipment, while trucks are used to deliver goods to the originating intermodal terminal as well as the final destination, in the case of domestic shipments. Union Pacific’s intermodal business (comes under Premium segment), saw a solid 12% volume growth in Q1, a trend expected to continue in the near term. In another development, Union Pacific recently entered into an accelerated share buyback program for $2 billion. The company now anticipates share repurchases worth $6 billion in 2021. This will bolster the company’s EPS growth going forward.

Although there are multiple positive developments for Union Pacific, and its stock has already appreciated 11% year-to-date, we believe that the stock has some more room for growth. Going by our Union Pacific Valuation of $250 per share, based on expected adjusted EPS of $9.60 for full year 2021 and a P/E multiple of 26x, there is over 10% upside potential for UNP stock.

[Updated: 4/20/2021] UNP Q1 Earnings Preview

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

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.

See all Trefis Price Estimates and Download Trefis Data here

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