Union Pacific’s volume guidance
Analysts surveyed by Reuters have a 4Q16 revenue estimate of $5.1 billion for Union Pacific (UNP). In the comparable period last year, this Western US rail giant reported revenues of $5.2 billion.
Wall Street analysts are projecting $20.5 billion in revenues for UNP in the next four quarters. The company recorded revenues of $19.9 billion in the last four quarters.
The thorns and roses in UNP’s revenue path
Undoubtedly, coal was on the receiving end last year. By tons, it’s the largest commodity transported by railroads. But wait! With president-elect Donald Trump coming to power, that might change, since many believe the Obama administration largely focused on clean energy and neglected coal. With Trump’s views on the environment, coal is set to come back. The recent rise in coal prices (KOL) has reflected the mood of the new federal government.
Intermodal is still a weak area for Union Pacific (UNP). According to the U.S. Bureau of Economic Analysis, the ratio of retail inventory-to-sales has been steadily rising. It was 1.5 in September 2016.
On January 12, 2017, China posted the worst fall in exports since 2009 as fears of a trade war with the United States hovered over the country. That fear has the potential to disrupt the Trans-Pacific market, and the intermodal recovery for UNP could be delayed going forward.
There could also be some respite from US vehicle sales. According to a November 2016 IHS Global Insight forecast, US light vehicle sales (TSLA) are expected to rise to 17.4 million units and 17.5 million units in 2016 and 2017, respectively. A steady rise in fuel prices, however, could spoil the party for automotive volumes and thus railroads.
On the pricing front, Union Pacific may not see any specific gains. UNP’s pricing gains have fallen considerably over the past few quarters, from 4.5% in 2Q15 to 1.5% in 3Q16. That could be a deterrent to improving its top line.
If you’re interested in the transportation and logistics space, you can consider the Industrial Select Sector SPDR ETF (XLI). Major US railroads and airlines make up 8.9% and 12.5%, respectively, of XLI’s portfolio holdings.
Let’s move on now to see why analysts have made a downward revision in Union Pacific’s operating margins over the next four quarters.