Earnings Scorecard: Union Pacific (UNP)

Railroad giant Union Pacific Corp. (UNP) reported excellent results for the second quarter 2010, beating the Zacks Consensus Estimate by 19 cents. Overall, the analysts are bullish on the stock, given the company’s impressive results.

The impressive performance was driven by a robust operating ratio, strong growth in business volume, cost efficiency and pricing gains. Second quarter operating ratio came in at a historic high-level of 69.4% compared with 77.4% in the prior-year quarter. This is the first time that Union Pacific achieved a sub-70 benchmark.

Second Quarter Highlights

Net income surged to a record high of $711 million or $1.40 per share from $465 million or 92 cents per share in the year-ago quarter. Second quarter EPS was well ahead of the Zacks Consensus Estimate of $1.21.

Consumer Satisfaction Index was 89% compared with 87% in the year-ago quarter. Business volume (measured by total revenue carloads) was 2.18 million, up 18% year over year.

Total operating revenue was $4,182 million, up 27% year-over-year and also ahead of the Zacks Consensus Estimate of $4,097 million. Within this, total Freight revenue was $3,956 million, up 27% year over year.

Agreements of Analysts

In synergy with the company’s impressive results, the recent Zacks Consensus Estimate revision trend for EPS remains positive. Out of 24 analysts covering the stock, 22 revised their estimates upward for the third quarter of fiscal 2010 over the last 30 days. Similarly, for the fiscal year 2010, 23 of 24 analysts raised their estimates. None of the analysts revised their EPS estimates downward.

Union Pacific represents an attractive long-term investment with a diversified commodity mix and the largest tailwind from legacy contract re-pricing of any Class I rail. Furthermore, Union Pacific remains committed to making long-term investments in the companies that support operating efficiencies, growth and returns. Given the backdrop of positive pricing growth, improving volumes and continued productivity gains, management reiterated its target of achieving a low-70s operating ratio by 2012 (from 76.0% in FY09).

Magnitude of Estimate Revisions

In accordance with the overall positive trend of analysts’ estimate revision for Union Pacific, the Zacks Consensus Estimate for the third quarter 2010 EPS moved up 13 cents in the last 30 days and also increased 39 cents for fiscal 2010. Similarly, for fiscal 2011, EPS was up 33 cents in the last 30 days.

Our Recommendation

Although the strength and timing of a sustained economic recovery are uncertain, management is confident about its fiscal 2010 growth opportunities. We believe Union pacific will benefit from a continued population growth as well as from increased highway congestion and related environmental concerns. Union pacific is better insulated against the uncertain economy as approximately 37.0% of its revenues are tied to less cyclical freight such as agriculture and coal.

Union Pacific’s recent agreements with Pacer International and CSX have also set the stage for growth in the intermodal franchise. The company continues to invest in its intermodal business to reap the benefits in the long term. We believe that Union Pacific will experience the highest earnings growth among the major railroad companies over the next several years, driven by productivity and cost improvement and the revenue tailwind from its legacy contract-repricing story, which will last through fiscal 2011.

However, Union Pacific faces issues with the inconsistent coal demand and the uncertain economy, regulatory risks and significant capital expenditures for certain government-mandated projects. While we expect operating performance to gradually improve in fiscal 2010, we believe that one of the company’s most important segments, coal, will continue to lag through the remainder of fiscal 2010. We thus maintain our long-term Neutral recommendation for Union Pacific.

UNION PAC CORP (UNP): Free Stock Analysis Report

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