Union Pacific (NYSE:UNP) is scheduled to report its Q3 2021 results on Thursday, October 21. We expect the company 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 coal transportation as well as a rebound in industrial freight, in our view. However, the margins in Q3 may face some pressure due to inflationary headwinds and rising labor costs. While we estimate the revenue and earnings to be below the consensus estimates, our forecast indicates that Union Pacific’s valuation is around $255 per share, which is 13% above the current market price near $226, implying that there is still room for growth in UNP stock. Our interactive dashboard analysis on Union Pacific’s Pre-Earnings has additional details.
(1) Revenues expected to be slightly below the consensus estimates
Trefis estimates Union Pacific’s Q3 2021 revenues to be around $5.3 billion, slightly below the $5.4 billion 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. More than a 2x rise in natural gas prices over the last year or so has resulted in an increased demand for coal, and the U.S. coal production is estimated to grow 10% y-o-y to 588 million short tons for the full year 2021.  This will aid the coal transportation demand for railroad companies, including Union Pacific.
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Looking back at Q2 2021, Union Pacific’s total revenues grew 30% y-o-y to $5.5 billion, primarily led by a large 50% growth in Premium segment (includes intermodal and automotive), with a rise in automotive production. 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 Q3 2021 earnings per share (EPS) is expected to be $2.46 per Trefis analysis, 5 cents below the consensus estimate of $2.51. Union Pacific’s net income of $1.8 billion in Q2 2021 reflected a 63% rise from its $1.1 billion figure in the prior-year quarter. This can be attributed to higher revenues, and a nearly 600 bps fall in operating ratio to 55.1%. Looking forward, inflationary pressure and rising wages likely impacted the company’s margins in Q3, weighing on overall earnings growth. That said, for the full-year 2021, we expect the EPS to be higher at $9.79, 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 $9.79 and a P/E multiple of around 26x in 2021, this translates into a price of $255, which is 13% above the current market price of around $226. The 26x P/E multiple is in-line with the levels seen in late 2020.
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.
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