Union Pacific (NYSE:UNP) is scheduled to report its Q2 2021 results on Thursday, July 22. We expect Union Pacific to post revenue and earnings slightly below the consensus estimates. That said, the company likely navigated well over the latest quarter, driven by an expected increase in intermodal demand as well as a rebound in bulk and industrial freight. Furthermore, the company has been able to keep its overall costs in check even during the challenging environment of the pandemic, a trend expected to continue in Q2, as well.
While we estimate the revenue and earnings to be below the consensus estimates, our forecast indicates that Union Pacific’s valuation is around $250 per share, which is 17% above the current market price near $214. Our interactive dashboard analysis on Union Pacific’s Pre-Earnings has additional details.
(1) Revenues expected to be slightly below the consensus estimates
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Trefis estimates Union Pacific’s Q2 2021 revenues to be around $5.25 Bil, slightly below the $5.33 Bil consensus estimate. The rise in the vaccination rate 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 driver shortages, and railroad companies, including Union Pacific, likely benefited from this with some of the trucking business shifting to intermodal. Looking back at Q1 2021, Union Pacific’s total revenues declined 4% y-o-y to $5.0 Bil, as a low single-digit growth in premium segment (includes intermodal business, which was up 11% y-o-y) was more than offset by lower bulk and industrial freight segment revenues. Our dashboard on Union Pacific’s Revenues offers more details on the company’s segments.
2) EPS also likely to be below the consensus estimates
Union Pacific’s Q2 2021 earnings per share (EPS) is expected to be $2.35 per Trefis analysis, 6% below the consensus estimate of $2.50. Union Pacific’s net income of $1.34 Bil in Q1 2021 reflected a 9% drop from its $1.47 Bil figure in the prior-year quarter. This can be attributed to lower revenues, and over 110 bps rise in operating ratio to 60.1%, partly due to higher inflation. Looking forward, with a rebound in bulk and industrial freight volume, we expect the company to see margin expansion, portending well for the overall earnings growth in Q2. For the full-year 2021, we expect the EPS to be $9.60 compared to $7.88 in 2020.
(3) Stock price estimate 17% above the current market price
Going by our Union Pacific’s Valuation, with an EPS estimate of around $9.60 and a P/E multiple of around 26x in 2021, this translates into a price of $250, which is 17% above the current market price of around $214. At the current price of $214, UNP stock is trading at 22x 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.
Note that the railroad stocks, including UNP stock, have seen a correction this month, after the reports of the Biden administration working on an executive order to address the issue of inflated and anti-competitive pricing for railroad and ocean shipping companies. We will be looking forward to hear views on pricing concerns, if any, from the company’s management during its earnings conference call.
Although the continued challenges in the energy freight business will have some impact on Union Pacific’s overall revenue growth rate in 2021, we believe the demand for intermodal and industrial segments 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.