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Why Are Analysts Expecting Union Pacific’s Revenue to Fall in 2016?

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Analysts’ revenue estimate

For Union Pacific Corporation (UNP), Wall Street analysts are projecting revenue of $4.9 billion in 1Q16. Compared to the reported revenue during the same period in 2015, this shows an anticipated double-digit fall of 12.4%. On a yearly basis, 24 analysts are projecting consensus revenue of $20.7 billion and $21.7 billion for 2016 and 2017, respectively. This translates into a fall of 5% and 0.1%, respectively, compared to revenue of $21.8 billion in 2015.

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Why are analysts estimating lower revenue?

Union Pacific derives most of its revenue from the intermodal segment followed by industrial products and coal. The intermodal business of most Class I railroads sailed through rough weather in recent quarters. This is mainly due to the slow pace of highway-to-rail conversion resulting from low fuel prices. Also, low fuel costs increased the competition from trucking companies.

Union Pacific’s intermodal business is also linked to China’s economy. The company’s intermodal business hauls merchandise meant for trade with China. The current slowdown in China’s economy took a toll on Union Pacific’s freight hauling prospects. Also, US grain exports are expected to go down in 2015–2016. This could hamper Union Pacific’s freight prospects through June 2016.

You should note that out of Union Pacific’s revenue of $21.8 billion in 2015, coal accounted for ~15%. Given the current depressed energy price environment and a global commodity price lull, investors are concerned about Union Pacific’s forward earnings.

Union Pacific’s coal revenue depends on production in the southern Powder River Basin. According to the US government, the Powder River production declined in the past few years mainly due to the recession and competition from natural gas. The slow pace of coal use in energy generation and competition from coal producers in the interior region fueled the slow growth of coal-by-rail.

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Management’s guidance

Union Pacific’s CFO, Rob Knight, said that “Looking ahead to 2016, we do have some significant hurdles. Our energy-related volumes will continue to be a challenge. Compared to last year’s strong first quarter, we expect this year’s first quarter coal volumes to decline around 20% or so.” However, until March 3, 2016, the coal volumes fell by a whopping 32%.

Peers’ projected revenue growth

All of the Class I railroads are aligning resources to match with shrinking volumes. There are also merger talks appearing in the industry in the present era of weak commodity prices. As discussed, analysts are expecting Union Pacific’s 2016 consensus revenue to fall by ~5.0%. Now, let’s look at the projected revenue change for industry peers:

  • Norfolk Southern (NSC) – -3.6%
  • Canadian Pacific (CP) – 0.6%
  • Canadian National Railway (CNI) – 1.6%
  • CSX (CSX) – -5.5%
  • Genesee & Wyoming (GWR) – 1.1%

Investors can look at the SPDR S&P Transportation ETF (XTN) for exposure to the transportation space. Major US railroads and trucking companies account for 12.2% and 21.7% of XTN, respectively.

In the next part, we’ll see what margins analysts are expecting for Union Pacific compared to its peers for 2016 and ahead.

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