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Why Analysts Are Leaning This Way on Union Pacific after the 3Q17 Results

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A dominant Western US carrier

Union Pacific (UNP) links 23 states by rail in the western two-thirds of the United States. The company connects with rail systems of Canada. Most notably, it’s the only Class I railroad that serves all six major gateways on the US-Mexico border.

Analysts’ recommendations on UNP

The analyst recommendations haven’t changed toward Union Pacific after its 3Q17 earnings. Of the 28 analysts surveyed by Thomson Reuters, five analysts (18%) recommend a “strong buy,” while seven (25%) recommend a “buy,” and sixteen (57%) recommend a “hold” on the stock.

Notably, no analyst recommends a “sell.”

UNP’s and peers’ target prices

Union Pacific has a 12-months target price of $121.5, indicating a return potential of 4.3%, compared with the following peer 12-month target prices:

  • Norfolk Southern (NSC) $132.1
  • CSX (CSX): $58.5, with a return potential of 11.7%
  • Canadian National Railway (CNI): 108.1 Canadian dollars, with a return potential of 3.4%
  • Canadian Pacific Railway (CP): 228.7 Canadian dollars
  • Genesee & Wyoming (GWR): $74.6, with a return potential of 2.1%

Investors bullish on transport stocks can consider investing in the SPDR S&P Transportation ETF (XTN), which has 24% of its total portfolio in trucking companies and 13% in prominent railroads in the US.

Why a “hold” on UNP?

Although Union Pacific was able to beat the analysts’ estimates for both revenues and earnings in 3Q17, the company’s margins have contracted on a YoY (year-over-year) basis. Its management has high expectations from its G55+0 program, which should lower its operating ratio. However, Hurricane Harvey wiped out some of the company’s efficiency gains.

On the volumes front, Union Pacific is not telling a great story. The company has links in Mexico and derives business from there, but with NAFTA (North American Free Trade Agreement) renegotiation talks taking center stage, the focus will be on UNP and Kansas City Southern (KSU).

Notably, UNP CEO (chief executive officer) Lance Fritz openly said that the US shouldn’t back out of the NAFTA deal. US withdrawal from NAFTA would likely have adverse implications on railroads operating in Mexico.

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