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Where Union Pacific Stock Could Be Heading

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Outperformed broader market

Union Pacific stock (UNP) is up ~21% YTD as of April 11 and has outperformed the broader market. The Dow Jones, the NASDAQ, and the S&P 500 have gained 12.1%, 19.8%, and 15.2%, respectively.

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The optimism surrounding the stock is primarily attributable to its back-to-back quarters of better-than-expected quarterly results. Union Pacific surpassed earnings estimates in the preceding four quarters and has marked significant YoY improvement as well.

Furthermore, a series of other positive events also instilled confidence in the stock. The major boost in the stock price came after Union Pacific on January 8 announced appointing railroad industry veteran Jim Vena as the company’s executive vice president and chief operating officer.

Vena is a well-known personality in the railroad industry (IYT). He helped Canadian National Railway (CNI) in achieving the best safety incident ratio in its history and the best operating ratio (operating expenses as a percentage of revenue) in the North American rail industry. Union Pacific wants Vena to lead its ambitious “Unified Plan 2020,” under which it intends to lower its operating ratio to below 60% by 2020.

The company’s announcement of a dividend increase in the first week of February further boosted its stock prices. The company raised its dividend rate by 10% and announced a new share repurchase program to buy 150 million of its common shares. In this context, Union Pacific on February 25 announced a $2.5 billion accelerated share repurchase program with Bank of America (BAC) and Morgan Stanley (MS).

Will the rally continue?

Wall Street analysts don’t see much upside potential in Union Pacific stock. Their consensus target price of $177.67 suggests a one-year return of 6.6%.

Union Pacific currently trades at a premium valuation. The stock’s PE ratio of 21.03x is higher than the sector’s average of 20.87x. Union Pacific’s top peers Norfolk Southern (NSC) and CSX (CSX) have PE multiples of 20.28x and 19.59x, respectively.

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