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All Aboard for Union Pacific's Pre-Earnings Rundown

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Part 3
All Aboard for Union Pacific's Pre-Earnings Rundown PART 3 OF 5

Union Pacific’s Operating Margin Battle: What the Analysts Think

UNP’s 1Q17 margins: analysts’ estimates

Reuters-surveyed analysts are projecting an operating margin of 34.8% for Union Pacific (UNP) in 1Q17. This margin would reflect a deterioration of 13 basis points from the company’s 1Q16 margin of ~34.9%. For the third quarter of 2017, analysts have a higher projection of 39%. Union Pacific has been typically driven by a surge in festive volumes and higher coal shipments.

Union Pacific&#8217;s Operating Margin Battle: What the Analysts Think

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Will Union Pacific be able to improve margins?

One major tool of improving operating margins is superior pricing. Real pricing gains improve any company’s margins over a period of time. For UNP, the main issues have to do with volumes, which haven’t seen a faster recovery. While volumes have risen over 2016 levels, this rise doesn’t really mean that UNP can command a hefty pricing premium.

Meanwhile, in 2016, UNP adopted its G55+0 program, wherein G55 represents the achievement of a 55% operating ratio, and the 0 represents zero injuries. Under this program, the company aims to achieve a margin of 45% in the long term. The company expects to attain ~$350.0 million–$450.0 million in cost savings in 2017, with the aim of reaching an operating margin of 40% by the end of 2019.

Higher energy prices in the second half of 2017, along with a significant surge in agricultural products, should help the company to realize better pricing on that front, and these factors should stop any further deterioration in UNP’s operating margins.

Peer group margins

Historically, Canada-based freight railroads Canadian National (CNI) and Canadian Pacific (CP) enjoy higher operating margins. The operating margins for these railroads have ranged typically between 40% and 45% in recent quarters.

Major Eastern US railroad CSX (CSX) will likely see a substantial improvement in its operating margins due to its new CEO, Hunter Harrison—a railroader famous on the circuit for his operational excellence.

The largest short-line operator in US, Genesee & Wyoming (GWR), has the lowest operating margin in the peer group, as its operations are scattered across the globe, with different geographical dynamics.

ETF option

Investors interested in transportation sector stock exposure can always 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.

In the next part, we’ll go through the analysts’ estimates for Union Pacific’s projected earnings.

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