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All Aboard for Union Pacific's Pre-Earnings Rundown

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

Union Pacific on the Street: The Analyst Recommendations

Analysts’ views of Union Pacific

Union Pacific (UNP) has a mean analyst rating of ~2.3, indicating a “buy.” Of the 31 analysts covering UNP ahead of its first quarter 2017 results, seven have issued a “strong buy” recommendation, while ten advise a “buy,” and 13 (42%) suggest a “hold” on the stock. Only one analyst has issued a “sell” recommendation on UNP stock.

Union Pacific on the Street: The Analyst Recommendations

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Which railroad has the maximum “buy” advice?

Along the entire class I railroad spectrum, Canadian Pacific (CP) has the maximum “buy” recommendations. But after Hunter Harrison’s departure as CP’s chief, the majority “buy” advice seems somewhat inflated, as the railroad doesn’t have much room for further cost cutting.

By comparison, CSX (CSX) has 18 analysts out of 29 recommending a “buy” on its stock. CSX will be the most closely watched railroad, going forward with Harrison now in charge. Union Pacific follows CSX in terms of “buy” recommendations, and Norfolk Southern (NSC) trails UNP, with ten analysts out of 28 analysts having issued a “buy.”

Notably, investors interested in transportation sector stock exposure can opt for ETFs like the iShares Dow Jones US Industrial ETF (IYJ). Major US railroads and airlines make up 6.2% and 4.6%, respectively, of IJY’s portfolio holdings.

Is the “buy” advice justified?

Without a doubt, there appears to be a large preference toward Union Pacific in the form of “buy” recommendations (55% of analysts), particularly in light of the fact that during the entire 4Q16 earnings call, UNP sounded cautious. Its management also avoided issuing any kind of specific earnings during its latest guidance.

UNP has already reduced its capital spending budget in 2017 by 11.4% on a year-over-year basis, and the company will likely continue to be hit by core pricing issues while not realizing significant pricing gains in coal and intermodal. It has also hinted further employee layoffs in 2017.

The takeaway

So if UNP’s complete focus is on reducing costs, the thing to watch will likely be the extent of such cost reductions going forward. But as 2017 will likely bring more freight volumes for UNP than in 2017, its targeted cost cuts may be difficult to achieve.

At the same time, UNP has a 26% stake in Ferromex, which operates freight rail in Mexico. This means that with President Trump’s talks of renegotiating NAFTA (North American Free Trade Agreement)—not to mention the general uncertainties that Trump has expressed toward Mexico as a key US trading partner—Ferromex could represent yet another factor to watch closely for UNP this year.

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