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All Aboard for Union Pacific's Pre-Earnings Rundown

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Part 4
All Aboard for Union Pacific's Pre-Earnings Rundown PART 4 OF 5

Will Union Pacific Beat Analysts’ Estimated Earnings in 1Q17?

Union Pacific’s past earnings

As the graph below shows, Union Pacific (UNP) was able to beat its analysts’ estimates for earnings in three of past seven quarters. UNP’s Reuters-surveyed analysts are estimating that UNP will report EPS (earnings per share) of $1.24 in 1Q17. At this time last year, the company’s EPS stood at $1.16.

Will Union Pacific Beat Analysts’ Estimated Earnings in 1Q17?

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Factors that could spoil UNP’s earnings

Union Pacific expects headwinds associated with its net impact of bonus depreciation on capital spending in 2017 at $100.0 million. For fiscal 2017, UNP estimated a 4%–5% rise in depreciation expenses.

Bonus depreciation is a scheme wherein a business can normally deduct the costs of acquiring an asset more rapidly against economic depreciation rules. But economic depreciation rules require a tangible asset to be expensed using a “straight line” method.

Other key considerations

As fuel prices have risen on a YoY (year-over-year) basis, UNP’s fuel expenses will likely be higher, driven by volumes and prices in 1Q17. Union Pacific also anticipates a slight rise in other expenses in fiscal 2017, which should put pressure on its earnings going forward. The projected 5.6% rise in interest expenses in 1Q17 should also pull down earnings in 1Q17.

Union Pacific anticipates inflation in 2017 to be ~3%. Owing to the higher costs associated with projected higher volumes, the gap between inflation and pricing gains is expected to narrow further. This narrowing could also lower earnings for 1Q17.

Peer group earnings in 1Q17

In UNP’s peer group, analysts have estimated slightly higher YoY earnings for major Eastern US railroads Norfolk Southern (NSC) and CSX (CSX). Driven by acquisitions, major short line partner Genesee & Wyoming (GWR) might also see a substantial rise in its 1Q17 EPS. Canadian Pacific (CP), which released 1Q17 earnings on April 19, 2017, already reported a 17% YoY fall in its EPS.

Notably, investors interested in the transportation and logistics space can always consider 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.

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