Union Pacific Corporation (NYSE: UNP)

Transcription

1 Sep 06, 2016 Union Pacific Corporation (NYSE: UNP) $95.28 USD ( As of 09/05/16 ) Zacks Rank 4-Sell Style:Value: Growth: Momentum: VGM: Data Overview 52 Week High-Low $ $ Day Average Volume 2,653,965 Beta 0.92 Market Cap B Dividend / Div Yld $2.20 / 2.31% Industry TRANS-RAIL Industry Rank 186 / 265 (Bottom %) Current Ratio 1.48 Debt/Capital 41.98% Net Margin 21.48% Price/Book (P/B) 3.89 Summary We are concerned about the company's continuous struggles due to coal related headwinds. Moreover, the derailment of a Union Pacific train in Oregon, carrying crude oil, has again raised concerns on rail safety. Also, with the opening of the expanded Panama Canal, the company s business might suffer as it operates exclusively in the western half of the country. We are, however, impressed by the company's efforts to reward shareholders through dividends and share buybacks. The company's efforts to reduce costs are also encouraging. The company, which achieved an operating ratio of 65.2% in the second quarter, is on track to achieve its guidance of % by Elements of the Zacks Rank Agreement Estimate Revisions ( days) Price/Cash Flow (P/CF) Earnings Yield 5.32% 100% 86% 100% 100% Debt/Equity 0.72 Value Score Q1 (Current Qtr) Q2 (Next Qtr) F1 (Current Year) F2 (Next Year) P/E (F1) P/E (F1) Rel to Industry 1.98 Revisions: 5 Up: 0 Down: 5 Revisions: 7 Up: 1 Down: 6 Revisions: 8 Up: 0 Down: 8 Revisions: 4 Up: 0 Down: 4 PEG Ratio 2.13 P/S (F1) 3.99 Magnitude Consensus Estimate Trend ( days) P/S (TTM) 3.90 P/CFO P/CFO Rel to Industry 6.12 EV/EDITDA Annual 8.94 Growth Score Q1-4.86% Q2-2.16% F1-1.74% F2-0.87% Proj. EPS Growth (F1/F0) -9.91% Hist. EPS Growth (Q0/Q-1) Upside Zacks Consensus Estimate vs. Most Accurate Estimate Qtr CFO Growth Yr CFO Growth 1.40 Return on Equity (ROE) 22.65% (NI - CFO) / Total Assets Asset Turnover 0.37 Momentum Score Most Accurate: 1.37 Zacks Consensus: 1.37 Q1 0.00% Most Accurate: 1.36 Zacks Consensus: 1.36 Q2 0.00% Most Accurate: 5.07 Zacks Consensus: 5.07 F1 0.00% Most Accurate: 5.69 Zacks Consensus: 5.69 F2 0.00% 1 week Volume change % Surprise Reported Earnings History 1 week Price Cng Rel to Industry -1.% (F1) EPS Est 1 week change 0.00% (F1) EPS Est 4 week change -0.29% (F1) EPS Est 12 week change -1.90% (Q1) EPS Est 1 week change 0.00% Reported: 1.17 Estimate: 1.17 Reported: 1.16 Estimate: 1.09 Reported: 1.31 Estimate: 1.43 Reported: 1.50 Estimate: 1.43 Average 4 Qtr Surprise Q End 06/16 Q End 03/16 Q End 12/15 Q End 09/ Zacks Investment Research, All Rights Reserved 10 S. Riverside Plaza Suite 10 Chicago, IL 6

2 The data on the front page and all the charts in the report represent market data as of 09/05/16, while the reports text is as of 09/06/2016 Overview Based in Omaha, NE, Union Pacific Corporation (UNP) provides rail transportation services across 23 states in the U.S. through its principal operating company, Union Pacific Railroad Company. As the largest railroad in North America, Union Pacific connects the Pacific and Gulf Coast ports with the Midwest and eastern United States gateways. The company also connects with Canada's rail systems and is the only railroad, serving all the six major gateways to Mexico. Union Pacific offers transportation services for agricultural products, automotive, lumber, steel, paper, food, chemicals, coal, and industrial products, as well as for finished vehicles and intermodal containers. The company also provides container and traffic services, primarily for shipper agents and consolidators, as well as for truckload carriers. Declining coal shipments remain a major headwind for the company whose fiscal year coincides with calender year. Zacks Equity Research: UNP Page 2 of 7

3 Reasons To Sell: Declining domestic coal shipments hurt the company's second-quarter results. The company reported lower-than-expected revenues in the second quarter primarily due to coal-related headwinds. Moreover, on a year-over-year basis, earnings plummeted 15% while revenues declined 12%. In the second quarter, coal revenues (freight) decreased 27% year over year to $494 million. Volumes declined 21% and average revenue per car fell 8% year over year. Furthermore, decreasing volumes of industrial products, Declining domestic coal shipments hurt the company's second-quarter results. agricultural products, automotive, chemicals and intermodal also hurt second-quarter results. Continuous below-par performance of key segments has the potential to hurt the stock significantly The guidance for the third quarter of 2016 implies that coal-related headwinds are not a thing of the past. Coal volumes are projected to decline approximately 20% while total volumes are likely to be down around 6% on a year-over-year basis. The opening of the expanded Panama Canal might impact the company s business as it could see a reduction in freight volumes. The increased capacity of the canal means that the cost of shipping from Asia to ports in the eastern U.S. would drop significantly. This has the potential to hurt western railroads like Union Pacific as the historical practice of bringing goods from Asia to western coast ports and then transporting them to the eastern parts by rail might be discontinued. In the event of the cost of shipping from Asia to the east coast dropping significantly, shippers might opt to go directly through the canal. However, only time will tell the extent of impact, if any. The issue of rail safety is a lingering concern for railroads. The Oregon derailment, carrying crude oil, has also shed light on the importance of implementing upgraded safety measures. In fact, Federal investigators have blamed the company for the accident, citing improper maintenance of track. Re-occurrence of such disturbing issues might hurt the stock significantly. Risks We are impressed with the company s efforts to reward shareholders through buybacks/dividend payouts. During the second quarter of 2016, the company repurchased 7 million shares for $2 million. Moreover, Union Pacific has an impressive dividend paying history and has been rewarding its shareholders through dividend payments for 117 consecutive years. The company has returned in excess of $2.2 billion to its shareholders in the first six months of 2016 through these measures. Union Pacific expects auto sales to grow further in The company expects shipments of finished vehicles and auto parts to grow on the back of strong production and sales. Lower gasoline prices and an improving U.S. economy should aid growth. Moreover, continued growth in LPG and industrial chemicals volumes should boost its chemicals segment despite the softness in the fertilizer market. The company focuses on its operating and productivity improvements to provide safe, efficient and high-quality service. Moreover, it expects the grain market to improve in the remainder of the year which could aid results. Moreover, the rebound in energy prices from extremely low levels augurs well for the company s coal and shale-related operations. The company, which achieved an operating ratio of 65.2% in the second quarter, is on track to achieve its guidance of % by Last Earnings Report Second Quarter Earnings Quarter Ending 06/2016 Union Pacific's second quarter earnings (on an adjusted basis) came in at $1.17, in line with the Zacks Consensus Estimate. On a year-over-year basis, earnings, however, declined 15%. Revenues decreased 12% year over year to $4.8 billion in the second quarter, marginally short of the Zacks Consensus Estimate. The bulk of revenues at Union Pacific is derived from freight. A 13% decline in freight revenues hurt the top line. Declining coal shipments weighed on the company's results yet again. Volumes slipped 11%, with coal playing the biggest culprit. Apart from coal, decreasing volumes of industrial products, agricultural products, automotive, chemicals and intermodal also led to the decline. Report Date Sales Surprise EPS Surprise Quarterly EPS Annual EPS (TTM) Jul 21, % 0.00% Operating income in the second quarter witnessed a decline of 15% year over year to $1.7 billion. Operating ratio (defined as operating expenses as a percentage of revenues) deteriorated 110 basis points year over year to 65.2%. The company expects capital expenses of $3.675 billion in 2016, down over $0 million from Segment Details Agricultural Products freight revenues were $845 million, down 3% year over year. Business volumes increased 2% year over year while average revenue per car declined 4%. Automotive accounted for $488 million of freight revenues, down 13% year over year. Business volumes were down 2% and average revenue per car fell 11% year over year. Chemicals contributed $864 million to freight revenues, down 5% year over year. Volumes were down 3% while average revenue per car dropped 2%. Coal revenues (freight) decreased 27% year over year to $494 million. Volumes declined 21% and average revenue per car fell 8% Zacks Equity Research: UNP Page 3 of 7

4 year over year. Industrial Products generated freight revenues of $8 million, down 14% year over year on an 11% volume decline. Average revenue per car was down 4%. Intermodal segment freight revenues went down 16% year over year to $909 million and volumes declined 14% year over year. Also, average revenue per car fell 3%. Other revenues declined 6% to $340 million in the second quarter of Liquidity Union Pacific exited the second quarter of 2016 with cash and cash equivalents of $1,8 million, compared with $1,391 million at the end of Long-term debt stood at $14.77 billion at the end of the reported quarter compared with $13.61 billion at the end of Adjusted debt-to-capitalization ratio increased to 47.1% from 45.7% at 2015-end. Recent News Dividend update Jul 28, 2016 In keeping with its efforts to reward shareholders, Union Pacific declared a dividend of $0.55 per share. The dividend will be paid on Sep, 2016, to the shareholders of record as of Aug 31. Zacks Equity Research: UNP Page 4 of 7

5 Industry Analysis Zacks Industry Rank: 186 / 265 (Bottom %) Top Peers AIR LEASE CORP (AL) CENTRAL JAPAN (CJPRY) CDN NATL RY CO (CNI) CDN PAC RLWY (CP) CSX CORP (CSX) GENESEE & WYO (GWR) KANSAS CITY SOU (KSU) NORFOLK SOUTHRN (NSC) USD PARTNERS (USDP) Industry Comparison Trans-rail Position in Industry: 8 of 9 Industry Peers UNP Market Cap B # of Analysts 20 Dividend Yield 2.11% Growth Score Hist. EPS Growth (3-5 yrs) -9.91% Proj. EPS Growth (F1/F0) -7.61% Curr. Cash Flow Growth -4.37% Hist. Cash Flow Growth (3-5 yrs) 9.72% Current Ratio 1.48 Debt/Capital 41.98% Net Margin 21.48% Return on Equity 22.65% Sales/Assets 0.37 Proj. Sales Growth (F1/F0) -8.85% Value Score Cash/Price EV/EBITDA 8.94 PEG Ratio 2.13 Price/Book (P/B) 3.89 Price/Cash Flow (P/CF) P/E (F1) Price/Sales (P/S) 3.99 Earnings Yield 5.32% Debt/Equity 0.72 Cash Flow ($/share) 7.94 Momentum Score Daily Price Chg -0.25% 1 Week Price Chg -1.% 4 Week Price Chg 2.83% 12 Week Price Chg 6.% 52 Week Price Chg 11.19% 20 Day Average Volume 2,831,101 (F1) EPS Est Wkly Chg 0.00% (F1) EPS Est Mthly Chg -0.29% (F1) EPS Est Qtrly Chg -1.90% (Q1) EPS Est Mthly Chg -0.95% X Industry S&P B B % 1.74% % 7.43% 3.27% 7.27% -0.95% 4.40% 7.42% 8.09% % 41.98% 17.94% 9.55% 16.77% 16.01% % 2.67% % 5.24% % -0.07% -1.36% -0.01% 4.72% 0.53% 7.21% 2.08% 10.22% 10.58% 447, % 0.00% -0.09% -0.00% -1.90% 0.89% -0.95% 0.00% CJPRY CNI CP B B B % 1.62% 1.11% NA % 5.27% 5.26% NA 6.76% 9.17% 11.81% -1.89% 3.27% -0.95% -0.79% 0.44% 0.48% 6.04% 8.80% % 38.01% 64.12% 19.85% 29.55% 23.36% 15.19% 23.43% 31.87% % -6.92% -6.31% -0.06% 0.56% 0.51% -1.36% -0.67% -0.88% -6.19% 4.64% 7.48% -9.06% 7.41% 14.72% 1.87% 18.51% 9.24% 4, , , % 0.00% 0.00% 0.00% 0.20% -0.57% 0.00% -2.32% -4.62% NA -1.09% -0.79% Zacks Equity Research: UNP Page 5 of 7

6 Zacks Rank Education The Zacks Rank is calculated from four primary inputs: Agreement, Magnitude, Upside and Surprise. Agreement This is the extent which brokerage analysts are revising their earnings estimates in the same direction. The greater the percentage of estimates being revised higher, the better the score for this component. For example, if there were 10 estimate revisions over the last days, with 8 of those revisions up, and the other 2 down, then the agreement factor would be 80% positive. If, however, 8 were to the downside with only 2 of them up, then the agreement factor would be 80% negative. The higher the percentage of agreement the better. Magnitude This is a measure based on the size of the recent change in the current consensus estimates. The Zacks Rank looks at the magnitude of these changes over the last days. In the chart to the right, the display shows the consensus estimate from -days ago, -days ago, 7-days ago, and the most current estimate The difference between the current estimate and the estimate from -days ago is displayed as a percentage. A larger positive percentage increase will score better on this component. Upside This is the difference between the most accurate estimate, as calculated by Zacks, and the consensus estimate. For example, a stock with a consensus estimate of $1.00, and a most accurate estimate of $1.05 will have an upside factor of 5%. This is not an indication of how much a stock will go up or down. Instead, it's a measure of the difference between these two estimates. This is particularly useful near earnings season as a positive upside percentage can be used to help predict a future surprise. Surprise The Zacks Rank also factors in the last few quarters of earnings surprises. Companies that have positively surprised in the recent past have a tendency of positively surprising again in the future (or missing if they recently missed). A stock with a recent track record of positive surprises will score better on this factor than a stock with a history of negative surprises. These stocks will have a greater likelihood of positively surprising again. Zacks Style Score Education The Zacks Style Score is as a complementary indicator to the Zacks Rank, giving investors a way to focus on the best Zacks Rank stocks that best fit their own stock picking preferences. Academic research has proven that stocks with the best Growth, Value, and Momentum characteristics outperform the market. The Zacks Style Scores rate stocks on each of these individual styles and assigns a rating of A, B, C, D and F. An A, is better than a B; a B is better than a C; and so on. Value Score Growth Score Momentum Score VGM Score As an investor, you want to buy stocks with the highest probability of success. That means buying stocks with a Zacks Rank #1 or #2, Strong Buy or Buy, which also has a Style Score of an A or a B. Zacks Equity Research: UNP Page 6 of 7

7 Disclosures The analysts contributing to this report do not hold any shares of this stock. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts' personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. Zacks Equity Research: UNP Page 7 of 7