All Aboard for Union Pacific's Pre-Earnings Rundown

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Part 2
All Aboard for Union Pacific's Pre-Earnings Rundown PART 2 OF 5

Can Union Pacific’s 1Q17 Revenue Exceed Analysts’ Expectations?

Analysts’ estimates for UNP’s 1Q17 revenue

Union Pacific’s (UNP) management has guided for a low-single-digit volume rise in 1Q17. That freight volumes rose 3% was expected, but overall freight volumes remain a concern for the largest US class I railroad by operations.

Analysts are estimating 1Q17 revenues of ~$5.0 billion for Union Pacific. When compared to its 1Q16 revenue of $4.8 billion, this would mean an expected rise of 4.3%. For next four quarters, analysts project UNP’s revenues to reach $20.9 billion, while in the past four quarters UNP recorded $19.9 billion in revenues. This would indicate a YoY (year-over-year) rise of 5.1%.

Can Union Pacific&#8217;s 1Q17 Revenue Exceed Analysts’ Expectations?

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UNP’s 2017 projected revenue

Union Pacific receives roughly 16% revenues from coal transportation (ARLP) originating in the PRB (Powder River Basin). The company’s coal revenues should rise as coal and coke carloads rose 17% in 1Q17 YoY.

By comparison, BNSF Railway’s (BRK-B) coal carloads rose 19.1%, as compared to CSX’s (CSX) rise of 5.3%. Arch rival Norfolk Southern (NSC) saw its coal carloads rise 20% in the first quarter of 2017.

Key details and factors

PRB coal stockpiles have stood for 87 days, as compared to the five-year average of 75 days, posted in January 2017, according to the EIA (Energy Information Administration). High levels of coal inventory and low natural gas prices (XOM) still have an impact on the coal shipments. If natural gas prices go up, it often results in a rise in coal demand and volumes.

Given the overall freight environment, however, Union Pacific may not realize its intended pricing from renewal contracts. This should act as a deterrent to revenue growth over next few quarters.

At the same time, US vehicle sales (TSLA) are expected to drop slightly to 17.4 million in 2017 from its previous level of 17.5 million, according to the February 2017 IHS Global Insight forecast. Given the steady growth in fuel prices, the rising automotive volumes sales rally might not progress much.

ETF discussion

Investors interested in the transportation and logistics space might consider the ETFs like the Industrial Select Sector SPDR ETF (XLI). Major US railroads and airlines make up 9.3% and 12.1%, respectively, of the portfolio holdings of XLI.

Next, we’ll see how analysts look at Union Pacific’s (UNP) operating margins in 2017.


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