What’s Happening With Union Pacific’s Coal Freight Business?

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[Updated Dec 15, 2021] UNP Stock Update

Bulk freight, primarily coal shipments, have been trending higher for Union Pacific (NYSE:UNP) over the recent quarters. The year 2021 has marked a sharp rebound in economic activities, resulting in a surge in demand for oil and natural gas. The prices for both the fuels have seen a spike in 2021, with the U.S. WTI crude averaging $68 per barrel, reflecting 74% growth from last year average of $39, and the natural gas price for electricity generators rising more than 2x to $4.99 MMBtu (Metric Million British Thermal Unit), compared to $2.40 average for last year. [1] Note that natural gas prices declined in November with mild weather across the U.S., resulting in lower consumption and a rise in inventory levels.

Now, this directly impacts the demand for coal. A fall in natural gas prices means its increased usage as an energy source, compared to coal, and vice-versa. The overall demand for coal has remained robust in 2021, with the total production likely rising 9% this year and it is expected to rise 6% in 2022, owing to the trends seen in natural gas prices. Higher production has meant increased demand for railroads. For Union Pacific, total carloads has remained at around 600K for the nine months period ending Sep 2021, but it has managed to see better price realization with 9% growth in average revenue per coal carload, bolstering the total coal freight revenue.

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Overall, Union Pacific’s coal freight revenues are likely to see continued growth in the near term. Despite the recent rise, coal freight revenue are still well below the levels seen in 2019, due to the impact of the pandemic on the overall railroad business in 2020. Coal freight alone accounts for nearly 10% of the company’s total revenues. Our dashboard on Union Pacific Revenues offers more details on the company’s business segments. We also compare Union Pacific’s revenue growth with its peers in Union Pacific (UNP) Revenue Comparison dashboard.

Wondering how does the top-line expansion translate into bottom-line growth? Explore Union Pacific Net Income Comparison for more details on the company’s bottom-line and its comparison to its peers.

 

[Updated Nov 16, 2021] UNP Stock Rise

The stock price of railroad company Union Pacific (NYSE:UNP) has seen a rise of 7% over the last month. The company reported its Q3 results late last month with revenue of $5.6 billion, up 13% y-o-y, slightly above our forecast of $5.3 billion, while its earnings of $2.57 on a per share basis was comfortably above our estimate of $2.46. While the results were better than our estimates, the overall growth was adversely impacted by supply chain constraints and disruptions in the automotive industry owing to the chip shortages. In fact, automotive freight was down 13% in Q3, and it was the only item that Union Pacific carries to see a negative growth.

Coal freight was expected to see strong growth and it saw a large 37% y-o-y rise in revenues. The company also managed to lower its operating ratio to 56.3% from 58.7% in the prior-year quarter. However, owing to the automotive disruptions, the company lowered its full-year 2021 outlook with revenue now expected to grow by 5%, compared to 7% as per prior guidance. Now, there are different views on when the chip shortage will end, but it appears that the issue will impact the overall automotive production in 2022 as well [2]. However, with strong economic growth, Union Pacific is likely to see increased demand for transportation of industrial products, coal, as well as its intermodal business. Our dashboard on Union Pacific’s Revenues offers more details on the company’s segments.

But now that UNP stock has seen a 7% rise in a month, outperforming its peers with CSX stock up 3% and NSC stock down <1%, will it continue its upward trajectory, or is a fall imminent? Going by historical performance, there is nearly an equal chance of a rise or a fall in UNP stock over the next month. Out of 354 instances in the last ten years that UNP stock saw a twenty-one day rise of 7% or more, 174 of them resulted in UNP stock rising over the subsequent one-month period (twenty-one trading days). This historical pattern reflects 174 out of 354, or about a 49% chance of a rise in UNP stock over the coming month. See our analysis on Union Pacific Stock Chances of Rise for more details. Even if we were to look at our Union Pacific’s Valuation, with an EPS estimate of around $10.00 and a P/E multiple of around 26x in 2021, this translates into a price of $262, which is only 8% above the current market price of around $241, implying that there isn’t much room for growth in UNP stock, and we believe that investors willing to buy this stock may be better off waiting for a dip to enter.

While UNP stock may see lower levels going forward, it is helpful to see how its peers stack up. Check out Union Pacific Stock Comparison With Peers to see how UNP stock compares against peers on metrics that matter. You can find more such useful comparisons on Peer Comparisons.

Calculation of ‘Event Probability‘ and ‘Chance of Rise‘ using last ten years data

  • After moving 0.8% or more over a five-day period, the stock rose in the next five days on 54% of the occasions.
  • After moving 0.8% or more over a ten-day period, the stock rose in the next ten days on 56% of the occasions
  • After moving 7.2% or more over a twenty-one-day period, the stock rose in the next twenty-one days on 49% of the occasions.

Union Pacific (UNP) Stock Return (Recent) Comparison With Peers

  • Five-Day Return: UNP highest at 0.8%; NSC lowest at -3.2%
  • Ten-Day Return: UNP highest at 0.8%; NSC lowest at -4.6%
  • Twenty-One Days Return: UNP highest at 7.2%; NSC lowest at -0.1%

 

[Updated Oct 19, 2021] UNP Q3 Earnings Preview

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. [1] This will aid the coal transportation demand for railroad companies, including Union Pacific.

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.

 

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

 Returns Dec 2021
MTD [1]
2021
YTD [1]
2017-21
Total [2]
 UNP Return 1% 17% 136%
 S&P 500 Return -1% 24% 107%
 Trefis MS Portfolio Return -2% 42% 282%

[1] Month-to-date and year-to-date as of 12/15/2021
[2] Cumulative total returns since 2017

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Notes:
  1. Short Term Energy Outlook, EIA [] []
  2. Infineon sees chip shortage extending into 2022 as quarterly revenue beats, Supantha Mukherjee, Reuters, Nov 10, 2021 []