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Why Most Analysts Are Recommending a ‘Buy’ on Union Pacific

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Dec. 4 2020, Updated 10:53 a.m. ET

Analysts’ recommendations

On Wall Street, 28 analysts rate Union Pacific Corporation’s (UNP) common stock. Out of the analysts, 21 or 75% of the analysts recommend investors “buy” the equity shares of Union Pacific. Six analysts or 21% advise market participants to “hold” the shares of Union Pacific. Only one or 4% of the analysts recommend a “sell” opinion on the ordinary shares of Union Pacific.

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Peer group recommendations

For Norfolk Southern (NSC), a major eastern rail operator, only six analysts are recommending a “buy” to investors. It’s important to note that 19 analysts made “hold” recommendations. Norfolk Southern’s peer, CSX (CSX), has a “buy” rating from 16 out of 28 analysts covering the stock. Ten analysts suggest a “hold” on the stock.

Among the major Canadian railroads, eight analysts are recommending a “buy” for Canadian National Railway (CNI). Meanwhile, 19 analysts are recommending that investors “hold” Canadian National Railway. There haven’t been any “sell” recommendations. Surprisingly, the second-largest Canadian railroad, Canadian Pacific (CP), received “buy” and “hold” recommendations from 19 analysts and seven analysts, respectively. It didn’t receive any “sell” recommendations.

Railroads, airlines, and trucking form part of the transportation sector. This sector is a subset of the industrial sector. Major US Class I railroads and airlines each account for 5% of the portfolio holdings of the iShares U.S. Industrials ETF (IYJ).

Why are majority analysts bullish on Union Pacific?

Credit rating agency Moody’s forecast that US natural gas prices could average $2.25 per MMBtu (British thermal units in millions) in 2016 and $2.5 per MMBtu in 2017. In its March 2016 short-term energy outlook report, the U.S. Energy Information Administration forecast that US natural gas prices could average $2.25 per MMBtu in 2016 and $3.02 per MMBtu in 2017. It should result in a shift towards coal. This would give Union Pacific some cushion on that front.

The biggest boost to Union Pacific is expected through intermodal. The company receives maximum revenue through intermodal operations. The rail traffic data in 2016 suggests that the company isn’t losing out to archrival BNSF Railway on that front. Investors should note that Union Pacific is the only Class I railroad in the US that has access to all six gates on the US-Mexico border.

The volume trends in 2016 suggest that Union Pacific’s automotive volumes rose by 14% through March 3, 2016. International intermodal rose by 12%. Chemicals rose by 1%. Union Pacific’s EBITDA (earnings before interest, tax, depreciation and amortization) is expected to go up from 46.1% in 2015 to 47.2% and 47.3% in 2016 and 2017. Union Pacific’s net debt-to-EBITDA ratio of 1.27x in 2015 is expected to rise to 1.41x in 2016. Considering Union Pacific’s size of operations, this is relatively low compared to other Class I railroads.

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