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Union Pacific Stock Rides High on Strong Q2 Earnings, Dividend

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Union Pacific’s stock price

On July 31, Western US rail giant Union Pacific (UNP) saw its stock set a new all-time high of $151.50. In the last week of July, the company announced a 10% dividend rise, taking its dividend per share to $0.80 from $0.73.

The news came as a sweet surprise on the back of UNP’s strong second-quarter earnings. The stock closed at $149.09 on August 6, up ~6.5% since its second-quarter earnings release on July 19.

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Snapshot of UNP’s second-quarter results

Union Pacific’s adjusted EPS stood at $1.98 in the second quarter, marginally exceeding Reuters-polled analysts’ consensus estimate of $1.95. The company’s adjusted EPS rose 36.5% YoY (year-over-year) from $1.45 in the second quarter of 2017. Being the largest taxpayer among all Class I railroad companies in the United States, UNP solidly benefited from lower taxes and pricing gains.

Union Pacific was also able to surpass analysts’ revenue estimate by a narrow margin in the quarter. The company’s revenue was $5.67 billion in the quarter, up 8% YoY from $5.2 billion in the same period last year. Its revenue growth was driven by a 4% YoY rise in its total revenue carloads. Its average revenue per car, a metric that indicates pricing gains, was up 4% YoY in the quarter.

Headwinds: NAFTA and operating margins

The largest public US Class I rail carrier’s operating margin failed to impress investors in the second quarter. Its operating margin contracted 1.1% to 37% in the quarter from 38.1% in the comparable period last year. Increased compensation and benefits expenses, as well as higher purchased services and materials costs, propelled the company’s operating expenses. Tunnel outages and a train-crew shortage negatively affected its second-quarter operating margins.

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Union Pacific holds ~26% in Ferromex, Mexico’s largest rail freight carrier by mileage. On July 3, CNBC aired a news piece involving Bruce Heyman, former US ambassador to Canada. Heyman ruled out the possibility of a NAFTA deal in 2018 or even next year. On many occasions, Union Pacific’s CEO, Lance Fritz, has expressed his worries about the NAFTA deal—a potential headwind for UNP’s upward journey.

ETF discussion

A total of 89 ETFs include Union Pacific stock in their portfolios. Of these funds, the iShares Transportation Average ETF (IYT) has the highest weight of 8.28% in the railroad company. Other major transportation giants at the top of IYT’s holdings are FedEx (FDX) at 13.66%, Norfolk Southern (NSC) at 9.68%, and J.B. Hunt Transport Services (JBHT) at 6.77%.

In the next article, we’ll discuss Norfolk Southern.

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