Union Pacific (UNP) has a mean consensus rating of ~4.1, representing a “buy.” Out of 28 analysts covering Union Pacific’s stock, 17 analysts (or 60.7%) have a “buy” recommendation, nine analysts (32.1%) advised investors to “hold” UNP’s stock, and two analysts (7.2%) recommend a “sell” opinion. In this article, we’ll look at the reasons that the majority of analysts recommend a “buy” for UNP stock.
Why a “buy” on UNP’s stock?
Union Pacific (UNP) has a good management team in place that has delivered in the past. In 2Q16, the company was able to improve its network velocity 8% and its terminal dwell 5%. Although its core pricing remains a concern, UNP’s widespread network, which covers all six gates on the US-Mexico border, should offer a distinct advantage. Plus, the company connects with Mexico’s two largest railroads.
Union Pacific accounts for one-fifth of the originated Class I railroads’ traffic in the US. Plus, it has a 23% market share of originated coal carloads in North America. Lower natural gas prices have created opportunities for the petrochemical industries located in the Gulf Coast. UNP can expect a big boost for its high-margin chemical merchandise volumes in the next few quarters.
Peer group’s recommendations
In the peer group, Norfolk Southern (NSC) has “buy” suggestions from 28.6% of analysts surveyed by Bloomberg. Plus, 50% of analysts have a “buy” opinion for NSC’s rival, CSX (CSX), which operates in the Eastern US. For Kansas City Southern (KSU), the smallest US Class I railroad, 38.1% of analysts offer a “buy” recommendation for the company’s stock.
Canada’s largest freight rail, Canadian National (CNI), has 21.4% of analysts offering a “buy” recommendation on CNI’s shares. For CNI’s fierce competitor, Canadian Pacific (CP), 72.4% analysts recommend a “buy” on the stock. Genesee & Wyoming (GWR), which recently acquired Providence and Worcester Railroad, has 53.8% analysts advising a “buy” to investors.
Major US railroads make up 5% of the portfolio holdings of the iShares US Industrials ETF (IYJ).
In the final part of this Union Pacific pre-earnings series, we’ll see how Union Pacific is positioned in the peer group with respect to valuation.