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.
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.
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.
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.